International Financial Law Prof Blog

Brazil agrees to change its transfer pricing rules to OECD Guidelines

Brazil has identified a clear pathway for bringing its existing transfer pricing framework into alignment with the international consensus, and is
weighing two options – immediate or gradual implementation, according to a new joint report by the OECD and Receita Federal, Brazil's federal revenue authority (RFB) .Convergence with the OECD transfer pricing standard requires full alignment with the OECD Guidelines, with a focus on the key areas outlined in Part I, but bearing in mind the need to retain and ensure simplicity, limit tax compliance costs and to ensure effective tax administration. The key consideration is how alignment should occur – immediately or gradually – and the related implications with respect to each option.

The main difference between the two options relates to the timing of the implementation. A similar amount of preparatory work will be necessary to achieve full alignment, but if alignment is achieved under the first option, the new rules will become applicable for all taxpayers immediately, meaning that the leadup to the entry into force of the new system will need to occur within a short timeframe with all different aspects of the system being rolled out simultaneously.

It is envisaged under the first scenario that the adoption of the new system in conformity with the OECD standard will occur in one time and replace in whole the existing framework with a directly effective and operational framework, as opposed to a staged approach in the second scenario.

Transfer Pricing in Brazil: Towards Convergence with the OECD Standard assesses the similarities and differences between Brazil's transfer pricing rules and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which is the international consensus on transfer pricing.

 

Starbucks and Netherlands APA Upheld by European Court of Justice

The General Court annuls the Commission’s decision on the aid measure implemented by the Netherlands in favor of Starbucks (released by the Court)

For William Byrnes analysis of this State Aid controversy, see William Byrnes’ Starbucks State Aid Commentary: Boiling Down to the Essence of the Residual   

Application of TNMM to Starbucks Roasting Operation: Seeking Comparables Through Understanding the Market Part I

My Starbucks’ State Aid Transfer Pricing Analysis: Part II

EU Commission State Aid Starbucks Decision – My U.S. Perspective

The Netherlands Appeals the Starbucks Decision

The Commission was unable to demonstrate the existence of an advantage in favor of Starbucks

In 2008, the Netherlands tax authorities concluded an advance pricing arrangement (APA) with Starbucks Manufacturing EMEA BV (SMBV), part of the Starbucks group, which, inter alia, roasts coffees. The objective of that arrangement was to determine SMBV’s remuneration for its production and distribution activities within the group. Thereafter, SMBV’s remuneration served to determine annually its taxable profit on the basis of Netherlands corporate income tax. In addition, the APA endorsed the amount of the royalty paid by SMBV to Alki, another entity of the same group, for the use of Starbucks’ roasting IP. More specifically, the APA provided that the amount of the royalty to be paid to Alki corresponded to SMBV’s residual profit. The amount was determined by deducting SMBV’s remuneration, calculated in accordance with the APA, from SMBV’s operating profit.

In 2015, the Commission found that the APA constituted aid incompatible with the internal market and ordered the recovery of that aid.

The Netherlands and Starbucks brought an action before the General Court for annulment of the Commission’s decision. They principally dispute the finding that the APA conferred a selective advantage on SMBV.

More specifically, they criticize the Commission for (1) having used an erroneous reference system for the examination of the selectivity of the APA; (2) having erroneously examined whether there was an advantage in relation to an arm’s length principle particular to EU law and thereby violated the Member States’ fiscal autonomy; (3) having erroneously considered the choice of the transactional net margin method (TNMM) for determining SMBV’s remuneration to constitute an advantage; and (4) having erroneously considered the detailed rules for the application of that method as validated in the APA to confer an advantage on SMBV.

In today’s judgment, the General Court annuls the Commission’s decision.

First, the Court examined whether, for a finding of an advantage, the Commission was entitled to analyze the tax ruling at issue in the light of the arm’s length principle as described by the Commission in the contested decision.

In that regard, the Court notes in particular that, in the case of tax measures, the very existence of an advantage may be established only when compared with ‘normal’ taxation and that, in order to determine whether there is a tax advantage, the position of the recipient as a result of the application of the measure at issue must be compared with his position in the absence of the measure at issue and under the normal rules of taxation.

The Court goes on to note that the pricing of intra-group transactions is not determined under market conditions. It states that where national tax law does not make a distinction between integrated undertakings and stand-alone undertakings for the purposes of their liability to corporate income tax, that law is intended to tax the profit arising from the economic activity of such an integrated undertaking as though it had arisen from transactions carried out at market prices. The Court holds that, in those circumstances, when examining, pursuant to the power conferred on it by Article 107(1) TFEU, a fiscal measure granted to such an integrated company, the Commission may compare the fiscal burden of such an integrated undertaking  resulting from the application of that fiscal measure with the fiscal burden resulting from the application of the normal rules of taxation under the national law of an undertaking placed in a comparable factual situation, carrying on its activities under market conditions.

The Court makes clear that the arm’s length principle as described by the Commission in the contested decision is a tool that allows it to check that intra-group transactions are remunerated as if they had been negotiated between independent companies. Thus, in the light of Netherlands tax law, that tool falls within the exercise of the Commission’s powers under Article 107 TFEU. The Commission was therefore, in the present case, in a position to verify whether the pricing for intragroup transactions accepted by the APA corresponds to prices that would have been negotiated under market conditions.

The Court therefore rejects the claim that the Commission erred in identifying an arm’s length principle as a criterion for assessing the existence of State aid.

Second, the Court reviewed the merits of the various lines of reasoning set out in the contested decision to demonstrate that, by endorsing a method for determining transfer pricing that did not result in an arm’s length outcome, the APA conferred an advantage on SMBV.

The Court began by examining the dispute as to the Commission’s principal reasoning. It notes that, in the context of its principal reasoning, the Commission found that the APA had erroneously endorsed the use of the TNMM. The Commission first stated that the transfer pricing report on the basis of which the APA had been concluded did not contain an analysis of the royalty which SMBV paid to Alki or of the price of coffee beans purchased by SMBV from SCTC, another entity of the group. Next, in examining the arm’s length nature of the royalty, the Commission applied the comparable uncontrolled price method (CUP method). As a result of that analysis, the Commission considered that the amount of the royalty should have been zero. Last, the Commission considered, on the basis of SCTC’s financial data, that SMBV had overpaid for the coffee beans in the period between 2011 and 2014.

The Court holds that mere non-compliance with methodological requirements does not necessarily lead to a reduction of the tax burden and that the Commission would have had to demonstrate that the methodological errors identified in the APA did not allow a reliable approximation of an arm’s length outcome to be reached and that they led to a reduction of the tax burden.

As regards the error identified by the Commission in respect of the choice of the TNMM and not of the CUP method, the Court finds that the Commission did not invoke any element to support as such the conclusion that that choice had necessarily led to a result that was too low, without a comparison being carried out with the result that would have been obtained using the CUP method. The Commission therefore wrongly found that the mere choice of the TNMM, in the present case, conferred an advantage on SMBV.

Likewise, the Court states that the mere finding by the Commission that the APA did not analyze the royalty does not suffice to demonstrate that that royalty was not actually in conformity with the arm’s length principle.

As regards the amount of the royalty paid by SMBV to Alki, according to an analysis of SMBV’s functions in relation to the royalty and an analysis of comparable roasting agreements considered by the Commission in the contested decision, the Court finds that the Commission failed to demonstrate that the level of the royalty should have been zero or that it resulted in an advantage within the meaning of the Treaty.

As regards the price of green coffee beans, the Court notes that the price of those beans was an element of SMBV’s costs that was outside the scope of the APA and that, in any event, the Commission’s findings did not suffice to demonstrate the existence of an advantage within the meaning of Article 107 TFEU. The Court notes, in particular, that the Commission was not entitled to rely on matters subsequent to the conclusion of the APA.

The Court then examined the dispute as to the Commission’s subsidiary reasoning whereby the APA allegedly conferred an advantage on SMBV because the detailed rules for the application of the TNMM, as endorsed by the APA, were erroneous.

It finds that the Commission did not demonstrate that the various errors it identified in the detailed rules for the application of the TNMM conferred an advantage on SMBV, whether as regards the validation by the APA of the identification of SMBV as the tested entity for the purposes of the application of the TNMM, the choice of profit level indicator or the working capital adjustment and the exclusion of the costs of the unaffiliated manufacturing company.

Consequently, according to the Court, the Commission has not managed to demonstrate the existence of an economic advantage within the meaning of Article 107 TFEU.

For William Byrnes analysis of this State Aid controversy, see William Byrnes’ Starbucks State Aid Commentary: Boiling Down to the Essence of the Residual   

Application of TNMM to Starbucks Roasting Operation: Seeking Comparables Through Understanding the Market Part I

My Starbucks’ State Aid Transfer Pricing Analysis: Part II

EU Commission State Aid Starbucks Decision – My U.S. Perspective

The Netherlands Appeals the Starbucks Decision

Nike State Aid case analysis: Would you pay $100 for a canvas sneaker designed the 20's?

Where does the residual value for "Just Do it" and the 'cool kids' retro branding of All Stars belong? I have received several requests in the U.S. about my initial thoughts on the EU Commission’s 56-page published (public version) State Aid preliminary decision with the reasoning that The Netherlands government provided Nike an anti-competitive subsidy via the tax system.  My paraphrasing of the following EU Commission statement [para. 87] sums up the situation:

The Netherlands operational companies are remunerated with a low, but stable level of profit based on a limited margin on their total revenues reflecting those companies’ allegedly “routine” distribution functions. The residual profit generated by those companies in excess of that level of profit is then entirely allocated to Nike Bermuda as an alleged arm’s length royalty in return for the license of the Nike brands and other related IP”

The question that comes to my mind is: "Would I pay $100 for a canvas sneaker designed the 20's that I know is $12 to manufacture, distribute, and have enough markup for the discount shoe store to provide it shelf space?" My answer is: "Yes, I own two pair of Converse's Chuck Taylor All Stars." So why did I spend much more than I know them to be worth (albeit, I wait until heavily discounted and then only on clearance).  From a global value chain perspective: "To which Nike function and unit does the residual value for the 'cool kids' retro branding of All Stars belong?"

U.S. international tax professionals operating in the nineties know that The Netherlands is a royalty conduit intermediary country because of its good tax treaty system and favorable domestic tax system, with the intangible profits deposited to take advantage of the U.S. tax deferral regime that existed until the TCJA of 2017 (via the Bermuda IP company).  Nike U.S., but for the deferral regime, could have done all this directly from its U.S. operations to each country that Nike operates in.  No other country could object, pre-BEPs, because profit split and marketing intangibles were not pushed by governments during transfer pricing audits.

The substantial value of Nike (that from which its profits derive) is neither the routine services provided by The Netherlands nor local wholesalers/distributors.  The value is the intangible brand created via R&D and marketing/promotion.  That brand allows a $10 – $20 retail price sneaker to sell retail for $90 – $200, depending on the country.  Converse All-Stars case in point.  Same  $10 shoe as when I was growing up now sold for $50 – $60 because Converse branded All-Stars as cool kid retro fashion.

Nike has centralized, for purposes of U.S. tax deferral leveraging a good tax treaty network, the revenue flows through NL.  The royalty agreement looks non-traditional because instead of a fixed price (e.g. 8%), it sweeps the NL profit account of everything but for the routine rate of return for the grouping of operational services mentioned in the State Aid opinion. If Nike was an actual Dutch public company, or German (like Addidas), or French – then Nike would have a similar result from its home country base because of the way its tax system allows exemption from tax for the operational foreign-sourced income of branches.  [Having worked back in the mid-nineties on similar type companies that were European, this is what I recall but I will need to research to determine if this has been the case since the nineties.]

I suspect that when I research this issue above that the NL operations will have been compensated within an allowable range based on all other similar situated 3rd parties.  I could examine this service by service but that would require much more information and data analysis about the services, and lead to a lesser required margin by Nike. The NL functions include [para 33]: “…regional headquarter functions, such as marketing, management, sales management (ordering and warehousing), establishing product pricing and discount policies, adapting designs to local market needs, and distribution activities, as well as bearing the inventory risk, marketing risk and other business risks.”

By example, the EU Commission states in its initial Nike news announcement:

Nike European Operations Netherlands BV and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property. For example, Nike European Operations Netherlands BV actively advertises and promotes Nike products in the EMEA region, and bears its own costs for the associated marketing and sales activities.

Nike’s internal Advertising, Marketing, and Promotion (AMP) services can be benchmarked to its 3rd party AMP providers.  But by no means do the local NL AMP services rise to the level of Nike’s chief AMP partner (and arguably a central key to its brand build) Wieden + Kennedy (renown for creating many industry branding campaigns but perhaps most famously for Nike’s “Just Do it” – inspired by the last words of death row inmate Gary Gilmore before his execution by firing squad).

There is some value that should be allocated for the headquarters management of the combination of services on top of the service by service approach.  Plenty of competing retail industry distributors to examine though.  If by example the profit margin range was a low of 2% to a high of 8% for the margin return for the combination of services, then Nike based on the EU Commission’s public information falls within that range, being around 5%.

The Commission contends that Nike designed its transfer pricing study to achieve a result to justify the residual sweep to its Bermuda deferral subsidiary.  The EU Commission states an interesting piece of evidence that may support its decision [at para 89]: “To the contrary, those documents indicate that comparable uncontrolled transactions may have existed as a result of which the arm’s length level of the royalty payment would have been lower…”.  If it is correct that 3rd party royalty agreements for major brand overly compensate local distributors, by example provide 15% or 20% profit margin for local operations, then Nike must also.  [I just made these numbers up to illustrate the issue]

All the services seem, on the face of the EU Commission’s public document, routine to me but for “adapting designs to local market needs”.  That, I think, goes directly to product design which falls under the R&D and Branding.  There are 3rd parties that do exactly this service so it can be benchmarked, but its value I suspect is higher than by example ‘inventory risk management’.  We do not know from the EU document whether this ‘adapting product designs to local market’ service was consistent with a team of product engineers and market specialists, or was it merely occasional and outsourced.  The EU Commission wants, like with Starbucks, Nike to use a profit split method.  “…a transfer pricing arrangement based on the Profit Split Method would have been more appropriate to price…”.  Finally, the EU Commission asserts [para. 90]: “…even if the TNMM was the most appropriate transfer pricing method…. Had a profit level indicator been chosen that properly reflected the functional analysis of NEON and CN BV, that would have led to a lower royalty payment…”.

But for the potential product design issue, recognizing I have not yet researched this issue yet, based on what I know about the fashion industry, seems rather implausible to me that a major brand would give up part of its brand residual to a 3rd party local distributor.  In essence, that would be like the parent company of a well-established fashion brand stating “Let me split the brand’s value with you for local distribution, even though you have not borne any inputs of creating the value”.  Perhaps at the onset of a startup trying to create and build a brand?  But not Nike in the 1990s.  I think that the words of the dissenting Judge in Altera (9th Cir June 2019) are appropriate:

An ‘arm’s length result is not simply any result that maximizes one’s tax obligations’.

The EU Commission obviously does not like the Bermuda IP holding subsidiary arrangement that the U.S. tax deferral regime allows (the same issue of its Starbucks state aid attack), but that does not take away from the reality that legally and economically, Bermuda for purposes of the NL companies owns the Nike brand and its associated IP.  The new U.S. GILTI regime combined with the FDII export incentive regime addresses the Bermuda structure, making it much somewhat less comparably attractive to operating directly from the U.S. (albeit still produces some tax arbitrage benefit).  Perhaps the U.S. tax regime if it survives, in combination with the need for the protection of the IRS Competent Authority for foreign transfer pricing adjustments will lead to fewer Bermuda IP holding subsidiaries and more Delaware ones.

My inevitable problem with the Starbucks and Nike (U.S. IP deferral structures) state aid cases is that looking backward, even if the EU Commission is correct, it is a de minimis amount (the EU Commission already alleged a de minimis amount for Starbucks but the actual amount will be even less if any amount at all).  Post-BEPS, the concept and understanding of marketing intangibles including brands is changing, as well as allowable corporate fiscal operational structures based on look-through (GILTI type) regimes. More effective in the long term for these type of U.S. IP deferral structures is for the EU Commission is to spend its compliance resources on a go-forward basis from 2015 BEPS to assist the restructuring of corporations and renegotiation of APAs, BAPAs, Multilateral PAs to fit in the new BEPS reality.  These two cases seem more about an EU – U.S. tax policy dispute than the actual underlying facts of the cases.  And if as I suspect that EU companies pre-BEPS had the same outcome based on domestic tax policy foreign source income exemptions, then the EU Commission’s tax policy dispute would appear two-faced.

I’ll need to undertake a research project or hear back from readers and then I will follow up with Nike Part 2 as a did with Starbucks on this Kluwer blog previously.  See Application of TNMM to Starbucks Roasting Operation: Seeking Comparables Through Understanding the Market and then My Starbucks’ State Aid Transfer Pricing Analysis: Part II.  See also my comments about Altera:  An ‘arm’s length result is not simply any result that maximizes one’s tax obligations’.

Want to help me in this research or have great analytical content for my transfer pricing treatise published by LexisNexis? Reach out on [email protected]

Prof. William Byrnes (Texas A&M) is the author of a 3,000 page treatise on transfer pricing that is a leading analytical resource for advisors.

OECD Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy

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The international community has agreed on a road map for resolving the tax challenges arising from the digitalisation of the economy, and committed to continue working toward a consensus-based long-term solution by the end of 2020, the OECD announced today.

The 129 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) adopted a Programme of Work laying out a process for reaching a new global agreement for taxing multinational enterprises.

The document, which calls for intensifying international discussions around two main pillars, was approved during the May 28-29 plenary meeting of the Inclusive Framework, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer Organisations. It will be presented by OECD Secretary-General Angel Gurría to G20 Finance Ministers for endorsement during their 8-9 June ministerial meeting in Fukuoka, Japan.

Drawing on analysis from a Policy Note published in January 2019 and informed by a public consultation held in March 2019, the Programme of Work will explore the technical issues to be resolved through the two main pillars. The first pillar will explore potential solutions for determining where tax should be paid and on what basis ("nexus"), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located ("profit allocation").

The second pillar will explore the design of a system to ensure that multinational enterprises – in the digital economy and beyond – pay a minimum level of tax. This pillar would provide countries with a new tool to protect their tax base from profit shifting to low/no-tax jurisdictions, and is intended to address remaining issues identified by the OECD/G20 BEPS initiative.

In 2015 the OECD estimated revenue losses from BEPS of up to USD 240 billion, equivalent to 10% of global corporate tax revenues, and created the Inclusive Forum to co-ordinate international measures to fight BEPS and improve the international tax rules.

"Important progress has been made through the adoption of this new Programme of Work, but there is still a tremendous amount of work to do as we seek to reach, by the end of 2020, a unified long-term solution to the tax challenges posed by digitalisation of the economy," Mr Gurría said. "Today’s broad agreement on the technical roadmap must be followed by a strong political support toward a solution that maintains, reinforces and improves the international tax system. The health of all our economies depends on it."

The Inclusive Framework agreed that the technical work must be complemented by an impact assessment of how the proposals will affect government revenue, growth and investment. While countries have organised a series of working groups to address the technical issues, they also recognise that political agreement on a comprehensive and unified solution should be reached as soon as possible, ideally before year-end, to ensure adequate time for completion of the work during 2020.

Proposed India profit attribution rules reject OECD approach, add “sales” and “users” as apportionment factors

India’s Central Board of Direct Taxes (CBDT) on April 18 asked for public feedback on proposed new rules for attributing profits to Indian permanent establishments (PEs) that differ from the authorized OECD approach (AOA).

read the full analysis here at MNE Tax News

Georgia, the Kingdom of the Netherlands and Luxembourg deposit instruments of acceptance or ratification for the Multilateral BEPS Convention

The Kingdom of the Netherlands has deposited its instrument of acceptance and Georgia and Luxembourg have deposited their instruments of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (multilateral convention or MLI) with the OECD’s Secretary-General, Angel Gurría, underlining their strong commitments to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises. With its instrument of acceptance, the Kingdom of the Netherlands covers Curaçao and the (European and Caribbean parts of the) Netherlands.

In November 2016, over 100 jurisdictions concluded negotiations on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI")  that will swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. The MLI already covers 87 jurisdictions and entered into force on 1st July 2018. Signatories include jurisdictions from all continents and all levels of development and other jurisdictions are also actively working towards signature.

•  Signatories and Parties (MLI Positions)

The MLI offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide. The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation. It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies. 

OECD Releases Peer Review Reports for Stopping Treaty Abuse and MAPs

Latest releases

BEPS Action 6 Peer Review Report - First edition Progress continues with the implementation of the BEPS package, as the OECD releases additional peer review reports assessing countries’ efforts to implement the Action 6 and Action 14 minimum standards as agreed under the OECD/G20 BEPS Project.  BEPS Action 14 Peer Review Reports - Stage 1, Batch 5

Does your financial center company have economic substance?

Applyby information

Ernst Young information 

BDO information

PwC information

Cayman Laws

The International Tax Co-operation (Economic Substance) Bill, 2018

PASSED : By the House for the Third Meeting of the 2018/2019 Session of the Legislative Assembly on December 17th 2018.

^{[A Bill For A Law To Provide For An Economic Substance Test To Be Satisfied By Certain Entities; And For Incidental And Connected Purposes.]}

The Companies (Amendment) (No. 2) Bill, 2018

PASSED : By the House for the Third Meeting of the 2018/2019 Session of the Legislative Assembly on December 17th 2018.

^{[A Bill For A Law To Amend The Companies Law (2018 Revision) To Make Miscellaneous Changes To The Provisions Relating To Accounting Records And Exempted Companies; And To Provide For Incidental And Connected Purposes.]}

The Local Companies (Control) (Amendment) Bill, 2018

PASSED: By the House for the Third Meeting of the 2018/2019 Session of the Legislative Assembly on December 17th 2018.

^{[A Bill For A Law To Amend The Local Companies (Control) Law (2015 Revision) To Provide For Exempted Companies Carrying On Business In The Islands; And For Incidental And Connected Purposes.]}

British Virgin Islands Law - VIRGIN ISLANDS ECONOMIC SUBSTANCE (COMPANIES AND LIMITED PARTNERSHIPS) ACT, 2018

ARRANGEMENT OF SECTIONS
Section
1. Short title and commencement.
2. Interpretation.
3. Meaning of finance and leasing business.
4. Meaning of financial period.
5. General obligations.
6. Meaning of relevant activities.
7. Meaning of Core income-generating activities.
8. Economic substance requirements.
9. Presumptions of non-compliance for intellectual property business.
10. Assessment of compliance.
11. Requirement to provide information.
12. Penalties for non-compliance with economic substance requirements.
13. Right of appeal.
14. Procedure on appeal.
15. Time for compliance with section 12 notice.
16. Amendments to the 2017 Act.
17. Regulations and Rules.
SCHEDULE

OECD invites public input on the possible solutions to the tax challenges of digitalisation

As part of the ongoing work of the Inclusive Framework on BEPS, the OECD is seeking public comments on key issues identified in a public consultation document on possible solutions to the tax challenges arising from the digitalisation of the economy. The publication of the consultation document was foreshadowed with the release of a Policy Note by the Inclusive Framework on 29 January 2019 and follows the agreement of members of the Inclusive Framework to examine proposals involving two pillars; one pillar that focusses on the allocation of taxing rights and a second pillar that addresses remaining BEPS issues. The work will be carried out as the Inclusive Framework continues to work towards a consensus-based long-term solution in 2020. 

Following a mandate by G20 Finance Ministers in March 2017, the Inclusive Framework on BEPS, working through its Task Force on the Digital Economy (TFDE), delivered an Interim Report in March 2018, Tax Challenges Arising from Digitalisation – Interim Report 2018. One of the important conclusions of this report is that members agreed to review the impact of digitalisation on nexus and profit allocation rules and committed to continue working together towards a final report in 2020 aimed at providing a consensus-based long-term solution, with an update in 2019.

Since the delivery of the Interim Report, the Inclusive Framework further intensified its work and several proposals emerged that could form part of a long-term solution to the broader challenges arising from the digitalisation of the economy and the remaining BEPS issues. The work on these proposals is being conducted on a “without prejudice” basis; their examination does not represent a commitment of any member of the Inclusive Framework beyond exploring these proposals. In this context, the Inclusive Framework agreed to hold a public consultation on possible solutions to the tax challenges arising from the digitalisation of the economy on 13 and 14 March 2019 at the OECD Conference Centre in Paris, France. The objective of the public consultation is to provide external stakeholders an opportunity to provide input early in the process and to benefit from that input.

As part of this public consultation, this consultation document describes the proposals discussed by the Inclusive Framework at a high level and seeks comments from the public on a number of policy issues and technical aspects. The comments provided will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020.

Interested parties are invited to send their comments on this consultation document. Comments should be sent by no later than Friday, 1 March 2019 to [email protected] in Word format (in order to facilitate their distribution to government officials). All comments submitted should be addressed to the Tax Policy and Statistics Division, Centre for Tax Policy and Administration.

Please note that all comments on this consultation document will be made publicly available. Comments submitted in the name of a collective “grouping” or “coalition”, or by any person submitting comments on behalf of another person or group of persons, should identify all enterprises or individuals who are members of that collective group, or the person(s) on whose behalf the commentator(s) are acting. Speakers and other participants at the upcoming public consultation in Paris will be selected from among those providing timely written comments on this consultation document.

The proposals included in this consultation document do not represent the consensus views of the Inclusive Framework, the Committee on Fiscal Affairs (CFA) or their subsidiary bodies. Instead, they intend to provide stakeholders with substantive proposals for analysis and comment.

Public Consultation

A public consultation meeting will be held at the OECD Conference Centre in Paris on Wednesday, 13 March and Thursday morning, 14 March 2019. Further information about attending the public consultation is available online. Those wishing to attend are invited to register by no later than Friday, 1 March 2019.

Media queries should be directed to Pascal Saint-Amans (+33 1 45 24 91 08), Director of the OECD Centre for Tax Policy and Administration (CTPA) or Grace Perez-Navarro (+33 1 45 24 18 80), Deputy-Director of the CTPA.

EU Court of Justice Overrules EU Commission on State Aid (Decision Below)

Loyens and Loeff summary -

The General Court then turned to assessing whether the Belgian rules and the related rulings effectively constituted a scheme and found that the criteria were not met:

• Implementing measures were needed and the tax authorities had a genuine margin of discretion in deciding whether it was appropriate to grant the downward adjustment to the Belgian company’s taxable profits.

• The beneficiaries could not be identified on the sole basis of the tax provision in the law without further implementing measures.

• The Commission’s analysis of a limited sample of rulings did not meet the requisite standard of proof to establish a systematic approach. Deficiencies in the contested decision could not be remedied by additional information provided during the proceedings.

Case Below ...

APPLICATION pursuant to Article 263 TFEU for annulment of Commission Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium (OJ 2016 L 260, p. 61), THE GENERAL COURT (Seventh Chamber, Extended Composition), composed of M. van der Woude, President, V. Tomljenović (Rapporteur), E. Bieliūnas, A. Marcoulli and A. Kornezov, Judges, Registrar: S. Spyropoulos, Administrator, having regard to the written part of the procedure and further to the hearing on 28 June 2018.

The contested decision may be found here

15      By Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium (OJ 2016 L 260, p. 61, ‘the contested decision’), the European Commission found that the exemptions granted by the Kingdom of Belgium, by means of advance rulings under Article 185(2)(b) of the CIR 92, constituted an aid scheme within the meaning of Article 107(1) TFEU that was incompatible with the internal market and had been put into effect in breach of Article 108(3) TFEU.

16      Furthermore, the Commission ordered that the aid granted be recovered from the beneficiaries, a definitive list of which was to be drawn up by the Kingdom of Belgium following the decision. The annex to the contested decision contained an indicative list of 55 beneficiaries – including Magnetrol International, the applicant in Case T‑263/16 – identified on the basis of information provided by the Kingdom of Belgium in the course of the administrative procedure.

28      The operative part of the contested decision is worded as follows:

‘Article 1

The Excess Profit exemption scheme, based on Article 185(2)(b) of the [CIR 92], pursuant to which [the Kingdom of] Belgium granted tax rulings to Belgian entities of multinational corporate groups authorising those entities to exempt part of their profit from corporate income taxation constitutes aid within the meaning of Article 107(1) [TFEU] that is incompatible with the internal market and that was unlawfully put into effect by Belgium in breach of Article 108(3) [TFEU].

Article 2

(1) [The Kingdom of] Belgium shall recover all incompatible and unlawful aid referred to in Article 1 from the recipients of that aid.

(2) Any sums that remain unrecoverable from the recipients of the aid, following the recovery described in the paragraph 1, shall be recovered from the corporate group to which the recipient belongs.

(3) The sums to be recovered shall bear interest from the date on which they were put at the disposal of the beneficiaries until their actual recovery.

(4) The interest on the sums to be recovered shall be calculated on a compound basis in accordance with Chapter V of Regulation (EC) No 794/2004.

(5) [The Kingdom of] Belgium shall stop granting the aid referred to in Article 1 and shall cancel all outstanding payments of such aid with effect from the date of adoption of this decision.

(6) [The Kingdom of] Belgium shall also reject all requests for an advance ruling concerning the aid referred to in Article 1 submitted to the Ruling Commission and pending on the date of the adoption of this decision.

Article 3

(1) Recovery of the aid granted referred to in Article 1 shall be immediate and effective.

(2) [The Kingdom of] Belgium shall ensure that this Decision is fully implemented within four months following the date of notification of this Decision.

Article 4

(1) Within two months following notification of this Decision, [the Kingdom of] Belgium shall submit the following information:

(a)      the list of beneficiaries that have received the aid referred to in Article 1 and the total amount of aid received by each of them;

(b)      the total amount (principal and recovery interests) to be recovered from each beneficiary;

(c)      a detailed description of the measures already taken and planned to comply with this Decision;

(d)      documents demonstrating that the beneficiaries have been ordered to repay the aid.

(2) [The Kingdom of] Belgium shall keep the Commission informed of the progress of the national measures taken to implement this Decision until recovery of the aid referred to in Article 1 has been completed. It shall immediately submit, on simple request by the Commission, information on the measures already taken and planned to comply with this Decision. It shall also provide detailed information concerning the amounts of aid and recovery interest already recovered from the beneficiaries.

Article 5

This Decision is addressed to the Kingdom of Belgium.’

 Procedure and forms of order sought

 Procedure and forms of order sought by the parties in Case T‑131/16

29      By application lodged at the Court Registry on 22 March 2016, the Kingdom of Belgium brought an action seeking the annulment of the contested decision.

30      By a separate document, lodged at the Court Registry on 26 April 2016, the Kingdom of Belgium brought an application for interim measures, in which it claimed that the President of the General Court should suspend the operation of Articles 2 to 4 of the contested decision until the General Court has delivered its judgment on the main action. By order of 19 July 2016, the President of the General Court dismissed the application for interim measures and reserved the costs.

31      On 11 July 2016, the Court requested the Kingdom of Belgium to reply to a question. The Kingdom of Belgium complied with that request by letter of 19 July 2016.

32      By document lodged at the Court Registry on 11 July 2016, Ireland applied for leave to intervene in support of the form of order sought by the Kingdom of Belgium. By decision of 25 August 2016, the President of the Fifth Chamber of the General Court granted Ireland’s application to intervene. Ireland lodged its written submissions and the main parties lodged their observations on those submissions within the prescribed periods.

33      Following a change in the composition of the Chambers of the General Court on 21 September 2016, pursuant to Article 27(5) of the Rules of Procedure of the General Court, the Judge Rapporteur was assigned to the Seventh Chamber, to which the present case was accordingly allocated.

34      By document lodged at the Court Registry on 26 January 2017, the Kingdom of Belgium requested that the case be decided by a Chamber sitting in extended composition. On 15 February 2017, the Court took formal note, in accordance with Article 28(5) of the Rules of Procedure, of the fact that the case had been allocated to the Seventh Chamber, Extended Composition.

35      As a Member of the Seventh Chamber, Extended Composition, was unable to sit in the present case, by decision of 28 March 2017, the President of the General Court designated the Vice-President of the General Court to complete the Chamber.

36      Acting on a proposal from the Judge-Rapporteur, the President of the Seventh Chamber, Extended Composition, decided, on 12 December 2017, pursuant to Article 67(2) of the Rules of Procedure, to give the present case priority over others.

37      Acting on a proposal from the Judge-Rapporteur, the General Court (Seventh Chamber, Extended Composition) decided to open the oral part of the procedure and, by way of measures of organisation of procedure pursuant to Article 64 of the Rules of Procedure, requested the Kingdom of Belgium and the Commission to reply to a number of questions in writing. The parties complied with those requests within the prescribed periods.

38      By order of 17 May 2018, after hearing the parties, the President of the Seventh Chamber, Extended Composition, of the General Court decided to join Cases T‑131/16, Belgium v Commission, and T‑263/16, Magnetrol International v Commission, for the purposes of the oral part of the procedure, pursuant to Article 68(2) of the Rules of Procedure, and granted Magnetrol International’s request for confidential treatment vis-à-vis Ireland.

39      The parties presented oral argument and answered questions put to them by the Court at the hearing on 28 June 2018.

40      The Kingdom of Belgium claims that the Court should:

–        annul the contested decision;

–        in the alternative, annul Articles 1 and 2 of the operative part of the contested decision;

–        order the Commission to pay the costs.

41      Ireland requests the General Court to annul the contested decision, as specified in the form of order sought by the Kingdom of Belgium.

42      The Commission contends that the General Court should:

–        dismiss the action;

–        order the Kingdom of Belgium to pay the costs.

 Procedure and forms of order sought by the parties in Case T‑263/16

43      By application lodged at the Court Registry on 25 May 2016, Magnetrol International brought an action seeking the annulment of the contested decision.

44      On 20 June 2016, the Commission applied for proceedings to be stayed pending judgment in Case T‑131/16, Belgium v Commission, to which the applicant objected on 26 July 2016. By decision notified to the main parties on 9 August 2016, the President of the Fifth Chamber of the General Court rejected the Commission’s request for the proceedings to be stayed.

45      Following a change in the composition of the Chambers of the General Court on 21 September 2016, pursuant to Article 27(5) of the Rules of Procedure of the General Court, the Judge Rapporteur was assigned to the Seventh Chamber, to which the present case was accordingly allocated.

46      Acting on a proposal from the Seventh Chamber, the General Court decided, on 12 March 2018, pursuant to Article 28(3) of the Rules of Procedure, to assign the case to a Chamber sitting in extended composition.

47      As a Member of the Seventh Chamber, Extended Composition, was unable to sit in the present case, by decision of 15 March 2018, the President of the General Court designated the Vice-President of the General Court to complete the Chamber.

48      Acting on a proposal from the Judge-Rapporteur, the President of the Seventh Chamber, Extended Composition, decided, on 16 April 2018, pursuant to Article 67(2) of the Rules of Procedure, to give the present case priority over others.

49      Acting on a proposal from the Judge-Rapporteur, the General Court (Seventh Chamber, Extended Composition) decided to open the oral part of the procedure and, by way of measures of organisation of procedure pursuant to Article 64 of the Rules of Procedure, requested Magnetrol International and the Commission to reply to a number of questions in writing. The parties complied with those requests within the prescribed periods.

50      By order of 17 May 2018, after hearing the parties, the President of the Seventh Chamber, Extended Composition, of the General Court decided to join Cases T‑131/16, Belgium v Commission, and T‑263/16, Magnetrol International v Commission, for the purposes of the oral part of the procedure, pursuant to Article 68(2) of the Rules of Procedure, and granted Magnetrol International’s request for confidential treatment vis-à-vis Ireland.

51      As noted in paragraph 39 above, the parties presented oral argument and answered questions put to them by the Court at the hearing on 28 June 2018.

52      Magnetrol International contends that the General Court should:

–        annul the contested decision;

–        in the alternative, annul Articles 2 to 4 of the contested decision;

–        in any event, annul Articles 2 to 4 of the contested decision in so far as those articles, first, require any recovery from entities other than the entities that have been issued an advance ruling and, secondly, require the recovery of an amount equal to the beneficiary’s tax savings, without allowing the Kingdom of Belgium to take into account an actual upwards adjustment by another tax administration;

–        order the Commission to pay the costs.

53      The Commission claims that the General Court should:

–        dismiss the action;

–        order Magnetrol International to pay the costs.

 Law

54      After hearing the views of the parties in that regard at the hearing, the Court has decided to join the present cases for the purposes of the judgment also, in accordance with Article 68 of the Rules of Procedure.

 Preliminary observations

55      In support of its action, the Kingdom of Belgium raises five pleas in law. The first plea alleges a breach of Article 2(6) TFEU and of Article 5(1) and (2) TEU, in that the Commission encroached upon the tax jurisdiction of the Kingdom of Belgium. The second plea alleges an error of law and a manifest error of assessment, in that the Commission classified the measures as an aid scheme. It is divided into two parts disputing, first, the identification of the acts on which the alleged aid scheme at issue is based and, secondly, the finding relating to the lack of further implementing measures. The third plea alleges a breach of Article 107 TFEU, in that the Commission considered that the excess profit ruling system constituted a State aid measure. The fourth plea alleges that the Commission made a manifest error of assessment regarding the identification of the beneficiaries of the alleged aid. The fifth plea, raised ‘in the alternative’, alleges infringement of the general principle of legality and of Article 16(1) of Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 [TFEU] (OJ 2015, L 248, p. 9), in that the contested decision orders recovery from the multinational groups to which the Belgian entities that were issued an advance ruling belong.

56      In support of its action, Magnetrol International raises four pleas in law. The first plea alleges a manifest error of assessment, excess of power and failure to provide adequate reasoning in so far as the contested decision alleges the existence of an aid scheme. The second plea alleges a breach of Article 107 TFEU and of the duty to state reasons and a manifest error of assessment in so far as the contested decision classifies the purported scheme as a selective measure. The third plea alleges a breach of Article 107 TFEU and of the duty to state reasons and a manifest error of assessment in so far as the contested decision asserts that the purported scheme gives rise to an advantage. The fourth plea, raised ‘in the alternative’, alleges a breach of Article 107 TFEU, infringement of the principle of the protection of legitimate expectations, a manifest error of assessment, excess of power, and failure to provide adequate reasoning, as regards the recovery of the aid ordered in the contested decision, the identification of the beneficiaries and the amount to be recovered.

57      It follows from the presentation of all of the above pleas that the Kingdom of Belgium and Magnetrol International raise, albeit in a different order, pleas in law alleging, in essence:

–        first, that the Commission exceeded its powers in relation to State aid by encroaching upon the exclusive tax jurisdiction of the Kingdom of Belgium in the field of direct taxation (first plea in Case T‑131/16 and first part of the third plea in Case T‑263/16);

–        secondly, that the Commission erred in finding a State aid scheme in the present case, within the meaning of Article 1(d) of Regulation 2015/1589, inter alia because of the incorrect identification of the acts on which the alleged scheme was said to be based and the erroneous finding that the aid scheme did not require further implementing measures (second plea in Case T‑131/16 and the first plea in Case T‑263/16);

–        thirdly, that the Commission erred in regarding advance rulings in relation to excess profit as State aid, given inter alia the lack of an advantage and the lack of selectivity (third plea in law in Case T‑131/16 and third plea in law in Case T‑263/16);

–        fourthly, that the Commission infringed, inter alia, the principles of legality and of the protection of legitimate expectations in that it erroneously ordered the recovery of the alleged aid, including from the groups to which the beneficiaries of that aid belong (fourth and fifth pleas in law in Case T‑131/16 and the fourth plea in law in Case T‑263/16).

58      The General Court will examine the pleas in law in the order set out in paragraph 57 above.

 The Commission’s alleged encroachment upon the Kingdom of Belgium’s exclusive jurisdiction in the field of direct taxation

59      The Kingdom of Belgium and Magnetrol International submit, in essence, that the Commission exceeded its powers by using the State aid rules of EU law in order to determine unilaterally matters falling within the exclusive tax jurisdiction of a Member State. The determination of taxable income remains an exclusive competence of the Member States, as does the manner of taxing profits generated by cross-border transactions within groups of undertakings, even if it leads to double non-taxation. The Commission’s position of regarding advance rulings on excess profit as State aid because they are not in line with what the Commission considers to be the correct application of the arm’s length principle is tantamount to forced harmonisation of rules relating to the determination of taxable income, which does not fall within the competences of the European Union.

60      Ireland submits, in essence, that the contested decision seriously disturbs the balance of competences between the European Union and the Member States established, inter alia, by Article 3(6) TEU and Article 5(1) and (2) TEU, and confirmed by settled case-law.

61      The Commission contends, in essence, that although the Member States enjoy fiscal autonomy in the field of direct taxation, any fiscal measure a Member State adopts must comply with the State aid rules of EU law.

62      In that respect, it must be noted that, according to settled case-law, while direct taxation, as EU law currently stands, falls within the competence of the Member States, they must nonetheless exercise that competence consistently with EU law (see judgment of 12 July 2012, Commission v Spain, C‑269/09, EU:C:2012:439, paragraph 47 and the case-law cited). On the other hand, it is undisputed that the Commission is competent to ensure compliance with Article 107 TFEU.

63      Thus, interventions by Member States in areas which have not been harmonised in the European Union, such as direct taxation, are not excluded from the scope of the State aid rules. Accordingly, the Commission may find that a tax measure constitutes State aid provided that the conditions for making such a finding are met (see, to that effect, judgments of 2 July 1974, Italy v Commission, 173/73, EU:C:1974:71, paragraph 13; of 22 June 2006, Belgium and Forum 187 v Commission, C‑182/03 and C‑217/03, EU:C:2006:416, paragraph 81; and of 25 March 2015, Belgium v Commission, T‑538/11, EU:T:2015:188, paragraphs 65 and 66). The Member States must therefore exercise their competence in the field of taxation consistently with EU law (judgment of 3 June 2010, Commission v Spain, C‑487/08, EU:C:2010:310, paragraph 37). Accordingly, they must refrain from adopting any measure, in that context, liable to constitute State aid incompatible with the internal market.

64      It is true that, in the absence of EU rules governing the matter, it falls within the competence of the Member States to designate tax bases and to spread the tax burden across the different factors of production and economic sectors (see, to that effect, judgment of 15 November 2011, Commission and Spain v Government of Gibraltar and United Kingdom, C‑106/09 P and C‑107/09 P, EU:C:2011:732, paragraph 97).

65      However, that does not mean that every tax measure which affects inter alia the tax base taken into account by the tax authorities falls outside the scope of Article 107 TFEU. If such a measure in practice discriminates between companies that are in a comparable situation with regard to the objective of the measure in question and thereby grants the beneficiaries of the measure selective advantages which favour ‘certain’ undertakings or the production of ‘certain’ goods, it may be regarded as State aid for the purpose of Article 107(1) TFEU (see, to that effect, judgment of 15 November 2011, Commission and Spain v Government of Gibraltar and United Kingdom, C‑106/09 P and C‑107/09 P, EU:C:2011:732, paragraph 104).

66      In addition, a measure by which the public authorities grant certain undertakings advantageous tax treatment which – although it does not involve the transfer of State resources – places the beneficiaries in a more favourable position than other taxpayers is capable of constituting State aid for the purpose of Article 107(1) TFEU. On the other hand, advantages resulting from a general measure applicable without distinction to all economic operators do not constitute State aid for the purpose of Article 107(1) TFEU (see judgment of 21 December 2016, Commission v World Duty Free Group and Others, C‑20/15 P and C‑21/15 P, EU:C:2016:981, paragraph 56 and the case-law cited).

67      It follows from the foregoing that, since the Commission is competent to ensure compliance with Article 107 TFEU, it cannot be accused of having exceeded its powers by examining the measures comprising the alleged scheme at issue in order to determine whether they constituted State aid and, if they did, whether they were compatible with the internal market, within the meaning of Article 107(1) TFEU.

68      That conclusion is not called into question by the Kingdom of Belgium’s arguments concerning, first, its lack of tax jurisdiction in respect of the taxation of the excess profits and, secondly, its own competence to adopt measures to avoid double taxation.

69      The Kingdom of Belgium submits that, since the excess profits cannot be attributed to Belgian entities subject to tax in Belgium, those profits do not fall within the Belgian tax jurisdiction. Accordingly, the Commission cannot question the non-taxation of those profits in Belgium.

70      In so far as those arguments are to be understood as challenging the Commission’s competence to examine the measures in question, it should be noted that those measures concern advance rulings, issued by the Belgian tax authorities in the context of their competence in the field of direct taxation. In that respect, the case-law cited in paragraph 65 above should be borne in mind, according to which any tax measure that meets the conditions for the application of Article 107(1) TFEU constitutes State aid. It follows that the Commission, in the exercise of its competence relating to the application of Article 107(1) TFEU, must be able to examine the measures in question in order to determine whether they meet those conditions.

71      As regards the arguments concerning the Kingdom of Belgium’s competence to adopt measures in order to avoid double taxation, it indeed follows from the case-law that it is for the Member States to take the measures necessary to prevent situations of double taxation, by applying, in particular, the apportionment criteria followed in international tax practice (see, to that effect, judgment of 14 November 2006, Kerckhaert and Morres, C‑513/04, EU:C:2006:713, paragraph 23). However, as noted in paragraph 63 above, the Member States must exercise their tax competences in accordance with EU law and refrain from adopting any measure liable to constitute State aid incompatible with the internal market. Accordingly, the Kingdom of Belgium cannot invoke the need to avoid double taxation as an objective pursued by the Belgian tax authorities’ practice as regards excess profit, in order to justify an exclusive competence in that respect, the exercise of which would fall outside the scope of the Commission’s power to verify compliance with Article 107 TFEU.

72      Moreover, and in any event, it must be noted that, in the present case, it does not appear that the non-taxation of excess profit, as applied by the Belgian tax authorities, pursued the objective of avoiding double taxation. The application of the measures at issue was not subject to the condition that it be demonstrated that the excess profit in question had been included in the profit of another company. Nor was it necessary to demonstrate that that excess profit had actually been taxed in another country.

73      Article 185(2)(b) of the CIR 92 provides for a downward adjustment of a company’s profit only if that profit has been included in the profit of another company. However, the Kingdom of Belgium has not denied the findings made by the Commission in recitals 173 to 181 of the contested decision concerning the practice of the Belgian tax authorities – as explained, inter alia, by the Minister for Finance’s replies, mentioned in paragraphs 12 to 14 above – according to which the downward adjustment of the tax base of a company requesting an advance ruling was carried out without it being verified whether the profit deducted from that company’s tax base, as excess profit, was actually included in the profit of another company.

74      In the light of the foregoing considerations, the plea alleging that the Commission encroached upon the tax jurisdiction of the Kingdom of Belgium must be rejected as unfounded.

 The existence of an aid scheme, within the meaning of Article 1(d) of Regulation 2015/1589

75      The Kingdom of Belgium and Magnetrol International submit, in essence, that the Commission incorrectly identified the acts on the basis of which the excess profit system allegedly constituted an aid scheme and wrongly found that those acts did not require further implementing measures, within the meaning of Article 1(d) of Regulation 2015/1589. They also submit that the conclusion concerning the existence of an aid scheme is based on contradictory reasoning.

76      The Commission contends, in essence, that it followed a consistent line of reasoning throughout the contested decision, in that it considered that the excess profit scheme was based on Article 185(2)(b) of the CIR 92, as applied by the Ruling Commission, in the light of the interpretation given by the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of that provision. Those acts show a systematic and consistent approach by which the Belgian tax authorities exempted so-called excess profit from tax, without further implementing measures being required.

77      Under Article 1(d) of Regulation 2015/1589, ‘aid scheme’ means any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and any act on the basis of which aid which is not linked to a specific project may be awarded to one or several undertakings for an indefinite period of time or for an indefinite amount.

78      It follows from the case-law that, in the case of an aid scheme, the Commission may confine itself to examining the characteristics of the scheme at issue in order to assess, in the grounds for its decision, whether, by reason of the arrangements provided for under the scheme, the latter gives an appreciable advantage to beneficiaries in relation to their competitors and is likely to benefit in particular undertakings engaged in trade between Member States. Thus, in a decision which concerns such a scheme, the Commission is not required to carry out an analysis of the aid granted in individual cases under the scheme. It is only at the stage of recovery of the aid that it is necessary to look at the individual situation of each undertaking concerned (see judgment of 9 June 2011, Comitato ‘Venezia vuole vivere’ and Others v Commission, C‑71/09 P, C‑73/09 P and C‑76/09 P, EU:C:2011:368, paragraph 63 and the case-law cited).

79      In addition, it has been held that, in examining an aid scheme, where no legal act establishing that scheme is identified, the Commission may rely on a set of circumstances which taken as a whole indicate the de facto existence of an aid scheme (see, to that effect, judgment of 13 April 1994, Germany and Pleuger Worthington v Commission, C‑324/90 and C‑342/90, EU:C:1994:129, paragraphs 14 and 15).

80      It must be borne in mind that, in the contested decision, first of all, in recital 97 thereof, it is indicated that the excess profit exemption was granted on the basis of Article 185(2)(b) of the CIR 92. Next, in recital 98 of that decision, it is indicated that the application of Article 185(2)(b) of the CIR 92 by the Belgian tax administration is explained in the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of that provision. Lastly, in recital 99 of the contested decision, the Commission concluded that Article 185(2)(b) of the CIR 92, the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92 constitute the acts on the basis of which the excess profit exemption is granted.

81      However, in recital 125 of the contested decision, it is indicated that no provision of the CIR 92 provides for an abstract unilateral exemption of a fixed part or percentage of the profit actually recorded by a Belgian entity forming part of a group. It is also indicated that Article 185(2)(b) of the CIR 92 allows downward transfer pricing adjustments subject to the condition that the profit to be exempted, generated by the international transaction or arrangement in question, has been included in the profit of the foreign counterparty to that transaction or arrangement.

82      It is true that the Commission’s reasoning appears somewhat ambivalent, since, on the one hand, it refers to all of the acts listed in recital 99 of the contested decision as the acts on which the scheme at issue is based, whereas, on the other hand, in its analysis of the reference system, in the course of examining whether there is a selective advantage, it states that no provision of the CIR 92 prescribes an exemption such as that applied by the Belgian tax authorities.

83      However, it follows from a reading of the contested decision in its entirety that Article 185(2)(b) of the CIR 92, as applied by the Belgian tax authorities, constitutes the basis for the alleged aid scheme at issue and that the application of that provision may be deduced from the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of that provision.

84      Accordingly, it must be examined whether the alleged aid scheme, based on the acts identified by the Commission, requires further implementing measures within the meaning of Article 1(d) of Regulation 2015/1589.

85      The following observations may be made on the basis of the definition of an aid scheme in Article 1(d) of Regulation 2015/1589, set out in paragraph 77 above, as interpreted by the case-law.

86      First, if individual aid awards are made without further implementing measures being adopted, the essential elements of the aid scheme in question must necessarily emerge from the provisions identified as the basis for the scheme.

87      Secondly, where the national authorities apply that scheme, those authorities cannot have any margin of discretion as regards the determination of the essential elements of the aid in question and whether it should be awarded. For the existence of such implementing measures to be precluded, the national authorities’ power should be limited to the technical application of the provisions that allegedly constitute the scheme in question, if necessary after verifying that the applicants meet the pre-conditions for benefiting from that scheme.

88      Thirdly, it follows from Article 1(d) of Regulation 2015/1589 that the acts on which the aid scheme is based must define the beneficiaries in a general and abstract manner, even if the aid granted to them remains indefinite.

89      It is therefore necessary to assess the extent to which the elements highlighted above emerge from the acts identified by the Commission as the basis for the aid scheme at issue, so that the alleged aid measures, namely the excess profit exemptions, could be granted on the basis of those acts without it being necessary to adopt further implementing measures.

 The essential elements of the aid scheme at issue

90      In recitals 13 to 22 of the contested decision, the Commission describes the aid scheme at issue as consisting of an exemption of excess profit and sets out the elements which, in essence, constitute the essential elements for the grant of that exemption, which are summarised in recital 102 of the contested decision. Thus, first, the fact that the Belgian entities concerned are entities of a multinational group is taken into account. Secondly, account is taken of the fact that the entities concerned have obtained an advance ruling by the Ruling Commission, which is linked to a new situation, such as a reorganisation leading to the relocation of a central entrepreneur to Belgium, the creation of jobs, or investments. Thirdly, the existence of profit in excess of the profit that would have been made by comparable standalone entities operating in similar circumstances is taken into consideration. Fourthly, on the other hand, no account is taken of whether a primary upward adjustment was carried out in another Member State.

91      In that respect, it must be examined whether the essential elements of the alleged aid scheme, indicated above, emerge from the acts that the Commission referred to as the basis of the excess profit exemption system.

92      At the outset, it must be underlined that the Commission stated, in recitals 101 and 139 of the contested decision, that the essential elements of the alleged aid had been identified on the basis of an analysis of a sample of advance rulings. Thus, the Commission itself acknowledged that those essential elements did not emerge from the acts on which it considered the scheme was based, but from the advance rulings themselves or, rather, from a sample of those rulings.

93      In any event, although some of the essential elements of the scheme identified by the Commission may emerge from the acts identified in recitals 97 to 99 of the contested decision, that is not the case however for all of those essential elements.

94      As the Kingdom of Belgium and Magnetrol International have rightly submitted, neither the two-step methodology for calculating the excess profit nor the requirement of investments, the creation of jobs or the centralisation or increase of activities in Belgium follow, even implicitly, from the acts referred to by the Commission in recitals 97 to 99 of the contested decision as the basis of the scheme at issue. If those elements which, according to the Commission itself, constitute essential elements of the alleged aid scheme do not feature in the acts that supposedly constitute the basis of the scheme, the implementation of those acts and thus the grant of the alleged aid necessarily depends on the adoption of further implementing measures, with the result that there is no aid scheme within the meaning of Article 1(d) of Regulation 2015/1589.

95      First, the acts identified in recitals 97 to 99 of the contested decision, set out in paragraph 80 above, do not mention the two-step methodology, including the TNMM, for the calculation of excess profit. It follows from the contested decision, in particular from Section 6.3.2 thereof (recitals 133, 144 and 152 to 168 of that decision), that that methodology was applied systematically and constitutes an essential element of the scheme, since it is precisely the application of that methodology that makes the scheme selective.

96      Accordingly, without prejudging the question as to whether the determination of the excess profit using the two-step methodology, described in the contested decision, could lead to a selective advantage, it must be held that that constituent element of the scheme at issue nevertheless does not stem from the acts on which that scheme is based and could not therefore be applied without further implementing measures.

97      Secondly, as regards investments, the creation of jobs or the centralisation or increase of activities in Belgium by applicants for advance rulings, it should be noted that, in Section 6.3.2.1 of the contested decision, the Commission stated that, even though those elements were not listed as conditions for the grant of the excess profit exemption under Article 185(2)(b) of the CIR 92, they were essential in order to be eligible for an advance ruling, which was compulsory for the application of the exemption in question.

98      As the Commission itself recognised, inter alia in recital 139 of the contested decision, those elements do not emerge from the acts on which the scheme at issue is based, but from the advance rulings themselves, according to the sample that the Commission examined. Accordingly, as the Kingdom of Belgium and Magnetrol International rightly submit, if those elements do not emerge from the acts which, according to the Commission, constitute the basis of the aid scheme, those acts must necessarily be the object of further implementing measures. If, as the Commission submits, such investments are taken into account by the Belgian tax authorities for the purpose of granting the excess profit exemption, that will necessarily entail an analysis and a specific evaluation of the investments proposed by the Belgian entities concerned, as regards inter alia the nature and amount of those investments, or other details concerning the manner in which they would be made. Such an analysis could be carried out only on a case-by-case basis and would therefore require further implementing measures.

 The margin of discretion of the Belgian tax authorities

99      As the Commission rightly noted, in recital 100 of the contested decision, the existence of further implementing measures, within the meaning of Article 1(d) of Regulation 2015/1589, entails a degree of discretion on the part of the tax authority adopting the measures in question, allowing it to influence the amount or the characteristics of the aid or the conditions under which it is granted. The Commission considers, by contrast, that the mere technical application of the act providing for the grant of the aid in question does not constitute a further implementing measure within the meaning of Article 1(d) of Regulation 2015/1589.

100    It should be noted that the fact that a prior request for approval must be submitted to the competent tax authorities in order to benefit from an aid does not imply that those authorities have a margin of discretion, when they merely verify whether the applicant meets the requisite criteria in order to benefit from the aid in question (see, to that effect and by analogy, judgment of 17 September 2009, Commission v Koninklijke FrieslandCampina, C‑519/07 P, EU:C:2009:556, paragraph 57).

101    In the present case, it is undisputed that the non-taxation of excess profit is subject to the grant of an advance ruling. In that respect, it must be noted that Article 20 of the Law of 24 December 2002 defines an ‘advance ruling’ as the legal act by which the Federal Public Service for Finance determines, in accordance with the applicable provisions, how the law will apply to a particular situation or transaction that has not yet had tax consequences.

102    It must therefore be examined whether, in issuing such advance rulings, that service had a margin of discretion allowing it to influence the amount and the essential elements of the excess profit exemption and the conditions under which it was granted.

103    First, it is apparent from the explanatory memorandum to the Law of 21 June 2004 amending the CIR 92 (as summarised in paragraph 7 above) and from the Circular of 4 July 2006 (as described in paragraphs 9 to 11 above) that the downward adjustment provided for in Article 185(2)(b) of the CIR 92 must be carried out on a case-by-case basis in the light of the available information provided, in particular, by the taxpayer. In addition, it is indicated that no criteria may be established in respect of that adjustment, since the latter must be carried out on a case-by-case basis. However, it is stated that a correlative adjustment should be made only if the tax administration or the Ruling Commission considers both the principle and the amount of the primary adjustment to be justified. Furthermore, the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92 (as summarised in paragraphs 12 to 14 above) merely refer in general terms to the position of the Belgian tax administration as regards excess profit and the arm’s length principle.

104    It may be inferred from a combined reading of the acts mentioned in paragraph 103 above that, when the Belgian tax authorities issued advance rulings on excess profit, they did not carry out a technical application of the applicable regulatory framework, but, rather, carried out a qualitative and quantitative assessment of each request on a ‘case-by-case’ basis, in the light of the reports and evidence provided by the entity concerned, in order to decide whether it was justified to grant the downward adjustment provided for in Article 185(2)(b) of the CIR 92. Accordingly, contrary to the Commission’s assertions, inter alia in recital 106 of the contested decision, and in the absence of any other instructions that would limit the decision-making power of the Belgian tax administration, that administration necessarily enjoyed a genuine margin of discretion in deciding whether it was appropriate to grant such downward adjustments.

105    Secondly, as indicated in paragraph 73 above, Article 185(2)(b) of the CIR 92 provides for a downward adjustment of a company’s profit only if that profit has been included in the profit of another company. In practice however, as explained, inter alia, by the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92, the downward adjustment was carried out by the Ruling Commission without it having been determined to which foreign companies the excess profit should be attributed.

106    In addition, it follows from recitals 67 and 68 of the contested decision that the scheme at issue does not cover all the advance rulings issued on the basis of Article 185(2)(b) of the CIR 92. It concerns only advance rulings which granted downward adjustments without the administration having verified whether the profit concerned had been included in the profit of another company of the group established in another jurisdiction. By contrast, advance rulings which, in accordance with the wording of Article 185(2)(b) of the CIR 92, grant a downward adjustment corresponding to an upward adjustment of the taxable profit of another company of the group established in another jurisdiction do not form part of the aid scheme at issue.

107    Accordingly, as the Kingdom of Belgium and Magnetrol International rightly submit, if, on the basis of that provision, the Belgian tax administration may adopt both decisions which, according to the Commission, grant State aid and decisions which do not grant such aid, it cannot reasonably be maintained that the role of that administration is limited to the technical application of the scheme at issue.

108    Thirdly, on the basis of the information provided by the Kingdom of Belgium to the Commission concerning the operation of the Ruling Commission, it is necessary to examine how the Ruling Commission determined, in its individual examination of requests for advance rulings, whether there was a situation giving rise to excess profit, whether a downward adjustment should be carried out under Article 185(2)(b) of the CIR 92 and what the characteristics, the amount and the conditions of that adjustment should be.

109    As regards the characteristics of the excess profit exemption and the conditions in which it is granted, it suffices to recall the considerations set out in paragraphs 90 to 98 above, according to which certain essential elements of the alleged scheme do not emerge from the acts on which, according to the Commission, that scheme is based.

110    As regards the amount to be exempted, it should be noted that the percentage of profit considered to be excess profit is not defined in the acts on which the alleged aid scheme is based. Indeed, it is not possible to deduce from those acts a specific percentage, a range or even a ceiling, and no specific element is provided concerning the method of calculation to be applied. On the contrary, it can be seen from the contested decision (recital 103 thereof) that the individual facts, the amounts involved and the transactions to be taken into account differ from one advance ruling to another. Likewise, the description of excess profit, in recital 15 of the contested decision, shows that determining that profit requires an assessment, on a case-by-case basis, of studies submitted by the tax payer as regards, first, the company’s residual profit, generated from transactions with companies in the same group, and, secondly, the excess profit generated because of that company’s membership of a group, which is deducted from the residual profit, as calculated in the first step.

111    More specifically, as the Kingdom of Belgium and Magnetrol International rightly submit, the parameters for calculating the excess profit and the instructions necessary for the purpose of taking account, when issuing advance rulings, of synergies, investments, the centralisation of activities and the creation of jobs in Belgium are not set out in the acts on which, according to the Commission, the scheme at issue is based. It is therefore the Ruling Commission which (i) determined the essential elements that were required in order to obtain a downward adjustment and (ii) verified whether that requirement was met where it agreed to grant that adjustment. It cannot therefore be maintained that the margin of discretion of the Belgian tax authorities was limited to the mere technical application of the provisions identified in recital 99 of the contested decision.

112    Fourthly, it must be noted that the procedure before the Ruling Commission includes a preliminary phase during which the requests for an advance ruling are analysed and at the end of which some of the requests are officially taken into account. It is apparent from the annual reports of the Ruling Commission identified by the Kingdom of Belgium, in particular the 2014 report, that only around half of open files at the pre-notification stage result in an advance ruling. That is an indication that, contrary to the Commission’s submissions, the Ruling Commission has a margin of discretion which it actually exercises when granting or rejecting requests relating to excess profit, including at the pre-notification stage.

113    Lastly, it should be noted that, in recital 106 of the contested decision, the Commission indicates that the Ruling Commission has a limited margin of discretion to agree the exact percentage of the downward adjustment. However, it follows from the considerations set out in paragraphs 101 to 112 above that, in the present case, the Belgian tax authorities had a margin of discretion over all of the essential elements of the alleged aid scheme.

 Definition of the beneficiaries

114    As regards the definition of the beneficiaries, it should be noted that, in recital 109 of the contested decision, the Commission refers to Article 185(2)(b) of the CIR 92. That article, the wording of which is set out in paragraph 8 above, provides that it applies to companies which are part of a multinational group, as regards their reciprocal cross-border relationships.

115    It could indeed be considered that Article 185(2)(b) of the CIR 92 covers a general and abstract category of entities, namely companies forming part of a multinational group in the context of their reciprocal cross-border relationships. However, the beneficiaries of the scheme, as referred to in the contested decision, cannot be identified on the sole basis of that provision, without further implementing measures.

116    In the present case, the beneficiaries of the scheme, as the latter is found to exist by the Commission, correspond to a much more specific category than that of companies forming part of a multinational group in the context of their reciprocal cross-border relationships. According to the Commission’s assessments, inter alia in recital 102 of the contested decision, relating to the essential elements of the aid scheme at issue, that scheme applies to companies forming part of a multinational group which, on the basis of transfer pricing reports and the existence of excess profit calculated using those reports, seek the exemption of that profit by a request for an advance ruling and which, moreover, make investments, create jobs or centralise activities in Belgium.

117    In addition, it should be noted that the other acts on which the Commission found the scheme was based do not provide any additional details as regards the definition of the beneficiaries of the scheme at issue.

118    As regards, specifically, the Law of 24 December 2002, although Article 20 thereof sets out the requirement for a particular situation or transaction that has not yet had tax consequences, that law does not contain provisions intended to define the beneficiaries of the alleged scheme. Nor do the Circular of 4 July 2006 or the Minister for Finance’s replies of 13 April 2005, 11 April 2007 and 6 January 2015 provide details concerning the beneficiaries of the alleged scheme. Moreover, it must be noted that the latter acts were adopted after 2004, the year from which, according to the Commission, the scheme in question was applied.

119    Accordingly, it cannot be concluded that the beneficiaries of the alleged aid scheme are defined in a general and abstract manner by the acts on which the Commission found the scheme was based. Further implementing measures therefore necessarily have to be taken in order to define such beneficiaries.

120    It follows from the foregoing considerations that the Commission wrongly concluded that the excess profit exemption scheme, as defined by the Commission in the contested decision, did not require further implementing measures and therefore constituted an aid scheme, within the meaning of Article 1(d) of Regulation 2015/1589.

 The existence of a systematic approach

121    The conclusion in paragraph 120 above cannot be called into question by the Commission’s arguments alleging the existence of a systematic approach, which it identified by examining a sample of 22 of the 66 existing advance rulings.

122    It is necessary to bear in mind the case-law, cited in paragraph 79 above, according to which, in examining an aid scheme, where no legal act establishing that scheme is identified, the Commission may rely on a set of circumstances which taken as a whole indicate the de facto existence of an aid scheme (see, to that effect, judgment of 13 April 1994, Germany and Pleuger Worthington v Commission, C‑324/90 and C‑342/90, EU:C:1994:129, paragraphs 14 and 15).

123    Accordingly, it cannot be ruled out that the Commission may conclude that there is an aid scheme where it is able to demonstrate, to the requisite legal standard, a systematic approach, the characteristics of which meet the requirements set out in Article 1(d) of Regulation 2015/1589.

124    However, the Commission has not succeeded in demonstrating that the approach that it had identified met the requirements set out in Article 1(d) of Regulation 2015/1589.

125    In the first place, as regards the arguments put forward by the Commission inter alia at the hearing, according to which a systematic approach may constitute the very basis of the aid scheme, it suffices to note that it is not the basis of the scheme relied on in the contested decision. As noted in paragraph 80 above, in recitals 97 to 99 of the contested decision, the Commission stated that Article 185(2)(b) of the CIR 92, as applied by the Belgian tax administration, formed the basis of the alleged aid scheme at issue and that that application could be deduced from the explanatory Memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions concerning the application of that provision.

126    In the second place, even if the Commission’s arguments are to be understood as meaning that the essential elements of the aid scheme emerge from a systematic approach which, in turn, is said to emerge from the sample of advance rulings that it examined, it must be pointed out that, in the contested decision, the Commission was not able to demonstrate to the requisite legal standard the existence of such a systematic approach.

127    First of all, it must be noted that, in recitals 65 and 103 of the contested decision, the Commission acknowledged that it examined a sample of 22 of the 66 advance rulings concerned. As the Kingdom of Belgium and Magnetrol International rightly submit, the Commission did not explain, in the contested decision, either the choice of that sample or why it had been considered to be representative of all of the advance rulings. In response inter alia to a written question from the Court, which response was also clarified at the hearing, the Commission indicated that it had requested the advance rulings issued in 2005 (no ruling having been issued in 2004), 2007, 2010 and 2013 so that its examination would cover rulings issued at the beginning, middle and end of the period during which the Ruling Commission had issued such rulings.

128    In addition, the contested decision contains, in recitals 62 to 64 and footnote 80, references to 6 of the 66 advance rulings concerned, which are described briefly and referred to as examples capable of illustrating all of the advance rulings. However, no explanation is given in the contested decision as to why those 6 examples were chosen, why those examined advance rulings are sufficiently representative of all 66 advance rulings or why those 6 examples are sufficient to justify the Commission’s conclusion regarding the existence of a systematic approach by the Belgian tax authorities.

129    Next, it is necessary to recall the considerations set out in paragraphs 103 to 112 above, according to which the Belgian tax authorities examined each request on a case-by-case basis and had a margin of discretion that went well beyond a mere technical application of the provisions identified in recital 99 of the contested decision, when they issued each advance ruling following that examination, which, in itself, undermines the systematic nature of the approach allegedly followed by the Belgian tax authorities. In addition, the existence of a systematic approach is called into question by the finding made in paragraph 98 above, concerning the further implementing measures necessary in order to implement the excess profit exemption system at issue in the present case.

130    Lastly, the Kingdom of Belgium and Magnetrol International submit that several advance rulings did not incorporate the essential elements of the alleged aid scheme identified by the Commission in the contested decision, in particular because the advance rulings did not all concern the role of central entrepreneur as taken into consideration by the Commission, a centralisation or recentralisation of activities did not take place in every case and the calculation of the excess profit was carried out on a case-by-case basis and not always according to the two-step calculation methodology criticised by the Commission.

131    In that respect, it must be noted that the deficiencies identified in paragraphs 127 and 128 above cannot be remedied by the additional information provided by the Commission in response to the Court’s questions, mentioned in paragraph 49 above, concerning the sample of advance rulings that it had analysed. The Court cannot, without exceeding the limits of its power to review the legality of the contested decision, rely, in order to reject a plea for annulment submitted to it, on grounds which did not form part of that decision (see, to that effect, judgment of 22 April 2016, Ireland and Aughinish Alumina v Commission, T‑50/06 RENV II and T‑69/06 RENV II, EU:T:2016:227, paragraph 145).

132    In any event, and as the Kingdom of Belgium and Magnetrol International rightly submit, it follows from the additional information submitted by the Commission in response to the Court’s questions that the advance rulings in the sample examined by the Commission show individual responses given by the Belgian tax authorities to various situations before them. The information provided concerning the 22 rulings show that those rulings were issued in different situations, such as the merger or restructuring of production activities, the construction of new facilities, the increase of the production capacity of existing facilities or the internalisation of supply activities. Thus, contrary to recital 15 of the contested decision and to the reasoning followed by the Commission in order to prove that the alleged scheme granted the beneficiaries a selective advantage (Section 6.3.2.2 of the contested decision), the advance rulings in the sample examined do not all concern situations in which the Belgian entity concerned operated as a ‘central entrepreneur’.

133    In addition, it follows from the information provided by the Commission in its reply to the Court’s questions, referred to in paragraph 49 above, that the two-step approach to calculating the excess profit –– identified by the Commission as one of the essential elements of the alleged aid scheme and described by the Commission in recital 15 of the contested decision –– involving inter alia the use of transfer pricing reports and the TNMM, was not followed systematically.

134    Accordingly, apart from the deficiencies identified in paragraphs 127 and 128 above, which would undermine the arguments concerning the existence of a systematic approach on the part of the Belgian tax authorities, the sample to which the Commission refers in the contested decision cannot necessarily prove that such a systematic approach actually existed and that it was followed in all of the advance rulings concerned.

 Conclusion on the classification of the measures in question as an aid scheme

135    It follows from the foregoing considerations that the Commission erroneously considered that the Belgian excess profit system at issue, as presented in the contested decision, constituted an aid scheme.

136    Accordingly, it is necessary to uphold the pleas raised by the Kingdom of Belgium and Magnetrol International, alleging the infringement of Article 1(d) of Regulation 2015/1589, as regards the conclusion set out in the contested decision regarding the existence of an aid scheme. Consequently, without it being necessary to examine the other pleas raised against the contested decision, that decision must be annulled in its entirety, inasmuch as it is based on the erroneous conclusion concerning the existence of such a scheme.

 Costs

137    Under Article 134(1) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since the Commission has been unsuccessful, it must be ordered to pay, in addition to its own costs, those incurred by the Kingdom of Belgium, including those relating to the proceedings for interim measures, and by Magnetrol International, in accordance with the forms of order sought by them.

138    Under Article 138(1) of the Rules of Procedure, the Member States which have intervened in the proceedings are to bear their own costs. Ireland must therefore bear its own costs.

On those grounds,

THE GENERAL COURT (Seventh Chamber, Extended Composition)

hereby:

1.      Joins Cases T‑131/16 and T‑263/16 for the purposes of the present judgment;

2.      Annuls Commission Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium;

3.      Orders the European Commission to pay, in addition to its own costs, those incurred by the Kingdom of Belgium, including those relating to the proceedings for interim measures, and by Magnetrol International;

4.      Orders Ireland to bear its own costs.

17      In the first place, as regards the assessment of the aid measure (recitals 94 to 110 of the contested decision), the Commission considered that the measure in question constituted an aid scheme, based on Article 185(2)(b) of the CIR 92, as applied by the Belgian tax administration. That application is explained in the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92. According to the Commission, those acts constitute the basis on which the exemptions in question were granted. In addition, the Commission considered that those exemptions were granted without further implementing measures being required, since the advance rulings were merely technical applications of the scheme at issue. Furthermore, the Commission stated that the beneficiaries of the exemptions were defined in a general and abstract manner by the acts on which the scheme was based. Those acts referred to entities that form part of a multinational group of companies.

18      In the second place, as regards the conditions for applying Article 107(1) TFEU (recitals 111 to 117 of the contested decision), first, the Commission indicated that the excess profit exemption constituted an intervention by the State, imputable to it, and gave rise to a loss of State resources, since it resulted in a reduction of the tax liability in Belgium of undertakings benefiting from the scheme. Secondly, it considered that the scheme at issue was liable to affect intra-Union trade, since the undertakings that benefited from the scheme were multinational companies operating in several Member States. Thirdly, the Commission underlined that the scheme at issue relieved the undertakings benefiting from it from a burden they would otherwise be obliged to bear and that, consequently, that scheme distorted or threatened to distort competition by strengthening the financial position of those undertakings. Fourthly, the Commission considered that the scheme at issue conferred a selective advantage on Belgian entities and thus benefited only the multinational groups to which those entities belonged.

19      As regards, specifically, the existence of a selective advantage, the Commission considered that the excess profit exemption was a derogation from the reference system, identified as the Belgian corporate income tax system, since the tax was not applied to the total profit actually recorded by the company concerned but to an adjusted arm’s length profit (recitals 118 to 134 of the contested decision).

20      In that regard and primarily (recitals 135 to 143 of the contested decision), the Commission considered that the scheme at issue was selective, first of all, because it was available only to entities that were part of a multinational group, not to standalone entities or entities forming part of domestic corporate groups. Next, the scheme at issue resulted in selectivity between, on the one hand, multinational groups that amended their business model by establishing new operations in Belgium and, on the other hand, any other economic operators that continued to operate under existing business models in Belgium. Lastly, the scheme at issue was de facto selective since only Belgian entities forming part of a large or medium-sized multinational group could effectively benefit from the excess profit exemption, not entities that were part of a small multinational group.

21      As a secondary point (recitals 144 to 170 of the contested decision), the Commission stated that, even if it were accepted that the Belgian corporate income tax system contained a rule according to which the profit recorded by multinational group entities that exceeded an arm’s length profit should not be taxed, which the Commission disputed, the excess profit exemption constituted a derogation from the reference system, since both the rationale for that exemption and the methodology used to establish the excess profit contravened the arm’s length principle. That methodology comprised two steps.

22      In the first step, the arm’s length prices charged in transactions between the Belgian entity of a group and the companies with which it is associated were fixed based on a transfer pricing report provided by the taxpayer. Those transfer prices were determined by applying the transactional net margin method (TNMM). A residual or arm’s length profit was thus established, which, according to the Commission, corresponded to the profit actually recorded by the Belgian entity.

23      In the second step, on the basis of a second report submitted by the taxpayer, the Belgian entity’s adjusted arm’s length profit was established by determining the profit that a comparable standalone company would have made in comparable circumstances. The difference between the profit arrived at following the first and second steps (namely the residual profit minus the adjusted arm’s length profit) constituted the amount of excess profit which the Belgian tax authorities regarded as being the result of synergies or economies of scale arising from membership of a corporate group and which, accordingly, could not be attributed to the Belgian entity.

24      Under the scheme at issue, that excess profit was not taxed. According to the Commission, that non-taxation granted the beneficiaries of the scheme a selective advantage, particularly since the methodology for determining the excess profit departed from a methodology that leads to a reliable approximation of a market-based outcome and thus from the arm’s length principle.

25      In addition, the Commission considered that the scheme at issue could not be justified by the nature and the general scheme of the Belgian tax system (recitals 173 to 181 of the contested decision). Contrary to the assertions of the Kingdom of Belgium, the scheme at issue did not pursue the objective of avoiding double taxation, since it was not necessary, in order to benefit from the excess profit exemption, to demonstrate that that profit was included in the tax base of another company.

26      In the third place, the Commission considered that the measures in question constituted operating aid and were therefore incompatible with the internal market. Furthermore, since those measures were not notified to the Commission pursuant to Article 108(3) TFEU, they constituted unlawful aid (recitals 189 to 194 of the contested decision).

27      As regards the recovery of the aid (recitals 195 to 211 of the contested decision), the Commission stated that the Kingdom of Belgium could not rely on the principle of the protection of the beneficiaries’ legitimate expectations or on the principle of legal certainty in order to justify a failure to fulfil its obligation to recover the incompatible aid unlawfully granted and that the amounts to be recovered from each beneficiary could be calculated on the basis of the difference between the tax that would have been due, based on the profit actually recorded, and the tax actually paid as a result of the advance ruling.

Loyens and Loeff Commentary can be read here.

Belize signs landmark agreement to strengthen its tax treaties and Monaco deposits its instrument of ratification for the Multilateral BEPS Convention

Today, Belize signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Convention), becoming the 86th jurisdiction to join the Convention, which now covers almost 1,500 bilateral tax treaties.

In addition, Monaco yesterday deposited its instrument of ratification for the Convention with the OECD’s Secretary-General, Angel Gurría, therewith underlining its strong commitment to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises. The Convention is the first multilateral treaty of its kind, allowing jurisdictions to integrate results from the OECD/G20 BEPS Project into their existing networks of bilateral tax treaties. The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to “disappear” or be artificially shifted to low or no tax environments, where companies have little or no economic activity. Treaty shopping, in particular, is estimated to reduce the effective withholding tax rate by more than 5 percentage points from nearly 8% to 3%, generating large revenue losses for developed and developing countries alike. The Convention will become effective on 1 January 2019 for the first 47 tax treaties concluded among the 18 jurisdictions that have already deposited their acceptance or ratification instrument.

(Left to right: H.E. Mr. Joseph D. Waight, Financial Secretary of Belize, Mr. Ludger Schuknecht, OECD Deputy Secretary-General)

The Convention, negotiated by more than 100 countries and jurisdictions under a mandate from the G20 Finance Ministers and Central Bank Governors, is one of the most prominent results of the OECD/G20 BEPS Project. It is the world’s leading instrument for updating bilateral tax treaties and reducing opportunities for tax avoidance by multinational enterprises. Measures included in the Convention address treaty abuse, strategies to avoid the creation of a “permanent establishment”, and hybrid mismatch arrangements. The Convention also enhances the dispute resolution mechanism, especially through the addition of an optional provision on mandatory binding arbitration, which has been taken up by 28 jurisdictions.

The text of the Convention, the explanatory statement, background information, database, and positions of each signatory are available at http://oe.cd/mli.

State aid: Commission opens in-depth investigation into tax treatment of Nike in the Netherlands

The European Commission has opened an in-depth investigation to examine whether tax rulings granted by the Netherlands to Nike may have given the company an unfair advantage over its competitors, in breach of EU State aid rules.

Margrethe Vestager, Commissioner in charge of competition policy, said: "Member States should not allow companies to set up complex structures that unduly reduce their taxable profits and give them an unfair advantage over competitors. The Commission will investigate carefully the tax treatment of Nike in the Netherlands, to assess whether it is in line with EU State aid rules. At the same time, I welcome the actions taken by the Netherlands to reform their corporate taxation rules and to help ensure that companies will operate on a level playing field in the EU."

The Commission's formal investigation concerns the tax treatment in the Netherlands of two Nike group companies based in the Netherlands, Nike European Operations Netherlands BV and Converse Netherlands BV. These two operating companies develop, market and record the sales of Nike and Converse products in Europe, the Middle East and Africa (the EMEA region).

Nike European Operations Netherlands BV and Converse Netherlands BV obtained licenses to use intellectual property rights relating to, respectively, Nike and Converse products in the EMEA region. The two companies obtained the licenses, in return for a tax-deductible royalty payment, from two Nike group entities, which are currently Dutch entities that are "transparent" for tax purposes (i.e., not taxable in the Netherlands).The Nike group's corporate structure itself is outside the remit of EU State aid rules.

From 2006 to 2015, the Dutch tax authorities issued five tax rulings, two of which are still in force, endorsing a method to calculate the royalty to be paid by Nike European Operations Netherlands and Converse Netherlands for the use of the intellectual property.

As a result of the rulings, Nike European Operations Netherlands BV and Converse Netherlands BV are only taxed in the Netherlands on a limited operating margin based on sales. At this stage, the Commission is concerned that the royalty payments endorsed by the rulings may not reflect economic reality. They appear to be higher than what independent companies negotiating on market terms would have agreed between themselves in accordancewith the arm's length principle.

In particular, a preliminary analysis of the companies' activities found that:

• Nike European Operations Netherlands BV and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property. For example, Nike European Operations Netherlands BV actively advertises and promotes Nike products in the EMEA region, and bears its own costs for the associated marketing and sales activities.
• In contrast, the recipients of the royalty are Nike group entities that have no employees and do not carry out any economic activity.

The Commission investigation will focus on whether the Netherlands' tax rulings endorsing these royalty payments may have unduly reduced the taxable base in the Netherlands of Nike European Operations Netherlands BV and Converse Netherlands BV since 2006. As a result, the Netherlands may have granted a selective advantage to the Nike group by allowing it to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms. If confirmed, this would amount to illegal State aid.

The opening of an in-depth investigation gives the Netherlands and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.

The infographic is available in high resolution here.

 

Background

Nike is a US based company involved worldwide in the design, marketing and manufacturing of footwear, clothing, equipment and accessories, in particular in the sports area.

Tax rulings as such are not a problem under EU State aid rules if they simply confirm that tax arrangements between companies within the same group comply with the relevant tax legislation. However, tax rulings that confer a selective advantage to specific companies can distort competition within the EU's Single Market, in breach of EU State aid rules.

Since June 2013, the Commission has been investigating individual tax rulings of Member States under EU State aid rules. It extended this information inquiry to all Member States in December 2014.

The following investigations concerning tax rulings have already been concluded by the Commission:

• In October 2015, the Commission concluded that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively. As a result of these decisions, Luxembourg recovered €23.1 million from Fiat and the Netherlands recovered €25.7 million from Starbucks.
• In January 2016, the Commission concluded that selective tax advantages granted by Belgium to at least 35 multinationals, mainly from the EU, under its "excess profit" tax scheme are illegal under EU State aid rules. The total amount of aid to be recovered from 35 companies is estimated at approximately €900 million, including interest. Belgium has already recovered over 90% of the aid.
• In August 2016, the Commission concluded that Ireland granted undue tax benefits to Apple, which led to a recovery of €14.3 billion by Ireland.
• In October 2017, the Commission concluded that Luxembourg granted undue tax benefits to Amazon, which led to a recovery by Luxembourg of €282.7 million.
• In June 2018, the Commission concluded that Luxembourg granted undue tax benefits to Engie of around €120 million. The recovery procedure is still ongoing.
• In September 2018, the Commission found that the non-taxation of certain McDonald's profits in Luxembourg did not lead to illegal State aid, as it is in line with national tax laws and the Luxembourg-US Double Taxation Treaty.
• In December 2018, the Commission concluded thatGibraltar granted undue tax benefits of around €100 million to several multinational companies, through a corporate tax exemption scheme and through five tax rulings. The recovery procedure is ongoing.

The Commission also has an ongoing in-depth investigation concerning tax rulings issued by the Netherlands in favour of Inter IKEA and an investigation concerning a tax scheme for multinationalsin the United Kingdom.

In addition to implementing comprehensively the Anti-Tax Avoidance Directives (ATAD I and ATAD II), the Netherlands have announced plans for a broad reform tightening the requirements for tax rulings concerning international structures. For example, no rulings will be granted if a tax structure involves a tax haven or if the purpose of the ruling is essentially to avoid Dutch or foreign taxes. Moreover, to enhance transparency and consistency, all Dutch tax rulings involving international structures will be centrally managed and monitored, and the tax authorities will publish an anonymous summary of all these rulings. Finally, the Netherlands have also announced plans to introduce a withholding tax on interest and royalty payments made to companies in tax havens.  

The non-confidential version of the decision will be made available under the case number SA.51284 in the State aid register on the Commission's Competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

Brussels, 10 January 2019

What's in the IRS'​ proposed BEAT regulations? Part II: Tax Treaties and SCM Addressed.

The Internal Revenue Service issued 193 pages of proposed regulations today on the IRC section 59A base erosion and anti-abuse tax ("BEAT").  New Internal Revenue Code (IRC) section 59A imposes a tax equal to the base erosion minimum tax amount for certain taxpayers beginning in tax year 2018.

The Base Erosion and Anti-Avoidance Tax targets companies that potentially reduce their U.S. federal income tax liability through cross-border payments to their foreign affiliates. Under BEAT, an applicable taxpayer is required to pay a tax equal to the base erosion minimum tax amount for the taxable year on base erosion payments that are deductible payments made by certain corporations to their non-U.S. affiliates.

The base erosion percentage is determined for any taxable year by dividing the deductions taken by the applicable taxpayer with respect to its “base erosion payments” by the overall amount of deductions taken by the corporation (including deductions taken with respect to “base erosion payments,” but excluding net operating loss carrybacks and carryforwards, deductions for dividends attributable to foreign earnings, deductions in connection with GILTI and FDII, deductions for payments for certain services and deductions for “qualified derivative payments”. If the base erosion percentage is at least three percent (or two percent in the case of a bank or security dealer), then the taxpayer may be subject to BEAT.

The base erosion minimum tax amount is equal to the excess of (a) the product of the applicable base erosion tax rate and an applicable taxpayer’s modified taxable income, over (b) the applicable taxpayer’s regular tax liability reduced by certain credits. Credits cannot be applied against the base erosion minimum tax amount.6 BEAT is a five percent rate in 2018, a 10 percent rate from 2019 until 2025, and a 12.5 percent rate for all years thereafter. Banks or a registered securities dealer endure one percent higher BEAT rate than regular applicable taxpayers.

Impact of Income Tax Treaties On U.S. Permanent Establishments

Certain U.S. income tax treaties provide alternative approaches for the allocation or attribution of business profits of an enterprise of one contracting state to its permanent establishment in the other contracting state on the basis of assets used, risks assumed, and functions performed by the permanent establishment. The use of a treaty-based expense allocation or attribution method does not, in and of itself, create legal obligations between the U.S. permanent establishment and the rest of the enterprise. These proposed regulations recognize that as a result of a treaty-based expense allocation or attribution method, amounts equivalent to deductible payments may be allowed in computing the business profits of an enterprise with respect to transactions between the permanent establishment and the home office or other branches of the foreign corporation (“internal dealings”). The deductions from internal dealings would not be allowed under the Code and regulations, which generally allow deductions only for allocable and apportioned costs incurred by the enterprise as a whole. The proposed regulations require that these deductions from internal dealings allowed in computing the business profits of the permanent establishment be treated in a manner consistent with their treatment under the treaty-based position and be included as base erosion payments.

The proposed regulations include rules to recognize the distinction between the allocations of expenses. In the first instance, the allocation and apportionment of expenses of the enterprise to the branch or permanent establishment is not itself a base erosion payment because the allocation represents a division of the expenses of the enterprise, rather than a payment between the branch or permanent establishment and the rest of the enterprise. In the second instance, internal dealings are not mere divisions of enterprise expenses, but rather are priced on the basis of assets used, risks assumed, and functions performed by the permanent establishment in a manner consistent with the arm’s length principle. The approach in the proposed regulations creates parity between deductions for actual regarded payments between two separate corporations (which are subject to IRC Section 482), and internal dealings (which are generally priced in a manner consistent with the applicable treaty and, if applicable, the OECD Transfer Pricing Guidelines). The rules in the proposed regulations applicable to foreign corporations using this approach apply only to deductions attributable to internal dealings, and not to payments to entities outside of the enterprise, which are subject to the general base erosion payment rules as provided in proposed §1.59A-3(b)(4)(v)(A).

Exception from BEAT Payment with Respect to Services Cost Method

The SCM exception described in IRC Section 59A(d)(5) provides that IRC Section 59A(d)(1) (which sets forth the general definition of a base erosion payment) does not apply to any amount paid or accrued by a taxpayer for services if (A) the services are eligible for the services cost method under IRC Section 482 (determined without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure) and (B) the amount constitutes the total services cost with no markup component.

The Treasury Department and the IRS interpret “services cost method” to refer to the services cost method described in §1.482-9(b), interpret the requirement regarding “fundamental risks of business success or failure” to refer to the test in §1.482-9(b)(5) commonly called the business judgment rule, and interpret “total services cost” to refer to the definition of “total services costs” in §1.482-9(j). IRC Section 59A(d)(5) is ambiguous as to whether the SCM exception applies when an amount paid or accrued for services exceeds the total services cost, but the payment otherwise meets the other requirements for the SCM exception set forth in IRC Section 59A(d)(5). Under one interpretation of IRC Section 59A(d)(5), the SCM exception does not apply to any portion of a payment that includes any mark-up component. Under another interpretation of IRC Section 59A(d)(5), the SCM exception is available if there is a markup, but only to the extent of the total services costs. Under the former interpretation, any amount of markup would disqualify a payment, in some cases resulting in dramatically different tax effects based on a small difference in charged costs. In addition, if any markup were required, for example because of a foreign tax law or non-tax reason, a payment would not qualify for the SCM exception. Under the latter approach, the services cost would continue to qualify for the SCM exception provided the other requirements of the SCM exception are met. The latter approach to the SCM exception is more expansive because it does not limit qualification to payments made exactly at cost.

The proposed regulations provide that the SCM exception is available if there is a markup (and if other requirements are satisfied), but that the portion of any payment that exceeds the total cost of services is not eligible for the SCM exception and is a base erosion payment. The Treasury Department has determined that this interpretation is more consistent with the text of IRC Section 59A(d)(5). Rather than require an all-or-nothing approach to service payments, section 59A(d)(5) provides an exception for “any amount” that meets the specified test. This language suggests that a service payment may be disaggregated into its component amounts, just as the general definition of base erosion payment applies to the deductible amount of a foreign related party payment even if the entire payment is not deductible.[1]

The most logical interpretation is that a payment for a service that satisfies subparagraph (A) is excepted up to the qualifying amount under subparagraph (B), but amounts that do not qualify (i.e., the markup component) are not excepted. This interpretation is reinforced by the fact that IRC Section 59A(d)(5)(A) makes the SCM exception available to taxpayers that cannot apply the services cost method described in §1.482-9(b) (which permits pricing a services transaction at cost for IRC Section 482 purposes) because the taxpayer cannot satisfy the business judgment rule in §1.482-9(b)(5). Because a taxpayer in that situation cannot ordinarily charge cost, without a mark-up, for transfer pricing purposes, failing to adopt this approach would render the parenthetical reference in IRC Section 59A(d)(5)(A) a nullity. The interpretation the proposed regulations adopt gives effect to the reference to the business judgment rule in IRC Section 59A(d)(5). The Treasury Department and the IRS welcome comments on whether the regulations should instead adopt the interpretation of IRC Section 59A(d)(5) whereby the SCM exception is unavailable to a payment that includes any mark-up component.

To be eligible for the SCM exception, the proposed regulations require that all of the requirements of §1.482-9(b) must be satisfied, except as modified by the proposed regulations. Therefore, a taxpayer’s determination that a service qualifies for the SCM exception is subject to review under the requirements of §1.482-9(b)(3) and (b)(4), and its determination of the amount of total services cost and allocation and apportionment of costs to a particular service is subject to review under the rules of §1.482-9(j) and §1.482-9(k), respectively.

Although the proposed regulations do not require a taxpayer to maintain separate accounts to bifurcate the cost and markup components of its services charges to qualify for the SCM exception, the proposed regulations do require that taxpayers maintain books and records adequate to permit verification of, among other things, the amount paid for services, the total services cost incurred by the renderer, and the allocation and apportionment of costs to services in accordance with §1.482-9(k). Because payments for certain services that are not eligible for the SCM due to the business judgment rule or for which taxpayers select another transfer pricing method may still be eligible for the SCM exception to the extent of total services cost, the record-keeping requirements in the proposed regulations differ from the requirements in §1.482-9(b)(6).[2] Unlike §1.482-9(b)(6), the proposed regulations do not require that taxpayers “include a statement evidencing [their] intention to apply the services cost method to evaluate the arm's length charge for such services,” but the proposed regulations do require that taxpayers include a calculation of the amount of profit mark-up (if any) paid for the services. For purposes of qualifying for the SCM exception under IRC Section 59A(d)(5), taxpayers are required to comply with the books and records requirements under these proposed regulations but not §1.482-9(b)(6).

The proposed regulations also clarify that the parenthetical reference in IRC Section 59A(d)(5) to the business judgment rule prerequisite for applicability of the services cost method -- “(determined without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure)” -- disregards the entire requirement set forth in §1.482-9(b)(5) solely for purposes of IRC Section 59A(d)(5).

[1] IRC § 59A(d)(1).

[2] Treas. Reg. §1.59A-3(b)(3)(i)(B)(2).

IRS issues proposed regulations on key new international provision, the base erosion and anti-abuse tax

The Internal Revenue Service issued 193 pages of proposed regulations today on the IRC section 59A base erosion and anti-abuse tax ("BEAT").  New Internal Revenue Code (IRC) section 59A imposes a tax equal to the base erosion minimum tax amount for certain taxpayers beginning in tax year 2018. When applicable, this tax is in addition to the taxpayer’s regular tax liability. This new provision will primarily affect corporate taxpayers with gross receipts averaging more than $500 million over a three-year period who make deductible payments to foreign related parties.

The Base Erosion and Anti-Avoidance Tax targets companies that potentially reduce their U.S. federal income tax liability through cross-border payments to their foreign affiliates.1 Under BEAT, an applicable taxpayer is required to pay a tax equal to the base erosion minimum tax amount for the taxable year on base erosion payments that are deductible payments made by certain corporations to their non-U.S. affiliates.

An “applicable taxpayer” is a corporation other than a regulated investment company (“RIC”), a real estate investment trust (“REIT”), or an S corporation, which has average annual gross receipts for a three taxable-year period of at least $500 million dollars, and the base erosion percentage is three percent (or two percent in the case of a bank or security dealer).2

The base erosion minimum tax amount is, for 2019 through 2025, the excess of 10 percent of the modified taxable income of the applicable taxpayer for the taxable year over an amount equal to the regular tax liability of the taxpayer for the taxable year reduced by the excess of allowable tax credits.3 The tax credits allowed are (a) the credit allowed under I.R.C. section 38 for the research credit, plus (b) the portion of the applicable I.R.C. section 38 credits not in excess of 80 percent of the lesser of the amount of such credits or the base erosion minimum tax amount.

“Base erosion payment” means (a) any amount paid or accrued by a taxpayer to a related foreign person and with respect to which a deduction is allowable; (b) any amount paid or accrued by the taxpayer to a related foreign person in connection with the acquisition by the taxpayer from such person of depreciable or amortizable property; (c) certain reinsurance premiums paid to a related party; and (d) certain payments to expatriated entities that are “surrogate foreign corporations” or their related foreign persons.4 Base erosion payments do not include “qualified derivative payments”, payments with respect to certain services, or payments for cost of goods sold.

The base erosion percentage is determined for any taxable year by dividing the deductions taken by the applicable taxpayer with respect to its “base erosion payments” by the overall amount of deductions taken by the corporation (including deductions taken with respect to “base erosion payments,” but excluding net operating loss carrybacks and carryforwards, deductions for dividends attributable to foreign earnings, deductions in connection with GILTI and FDII, deductions for payments for certain services and deductions for “qualified derivative payments”.5 If the base erosion percentage is at least three percent (or two percent in the case of a bank or security dealer), then the taxpayer may be subject to BEAT.

The base erosion minimum tax amount is equal to the excess of (a) the product of the applicable base erosion tax rate and an applicable taxpayer’s modified taxable income, over (b) the applicable taxpayer’s regular tax liability reduced by certain credits. Credits cannot be applied against the base erosion minimum tax amount.6 BEAT is a five percent rate in 2018, a 10 percent rate from 2019 until 2025, and a 12.5 percent rate for all years thereafter. Banks or a registered securities dealer endure a one percent higher BEAT rate than regular applicable taxpayers.7

The proposed regulations provide detailed guidance regarding which taxpayers will be subject to section 59A, the determination of what is a base erosion payment, the method for calculating the base erosion minimum tax amount, and the required base erosion and anti-abuse tax resulting from that calculation. The proposed regulations include an explanation of the new provisions as follows:

• Part II describes the rules in proposed §1.59A-2 for determining whether a taxpayer is an applicable taxpayer on which the BEAT may be imposed.
• Part III describes the rules in proposed §1.59A-3(b) for determining the amount of base erosion payments.
• Part IV describes the rules in proposed §1.59A-3(c) for determining base erosion tax benefits arising from base erosion payments.
• Part V describes the rules in proposed §1.59A-4 for determining the amount of modified taxable income, which is computed in part by reference to a taxpayer’s base erosion tax benefits and base erosion percentage of any net operating loss deduction.
• Part VI describes the rules in proposed §1.59A-5 for computing the base erosion minimum tax amount, which is computed by reference to modified taxable income.
• Part VII describes general rules in proposed §1.59A-7 for applying the proposed regulations to partnerships.
• Part VIII describes certain rules in the proposed regulations that are specific to banks and registered securities dealers.
• Part IX describes certain rules in the proposed regulations that are specific to insurance companies.
• Part X describes the anti-abuse rules in proposed §1.59A-9.
• Parts XI-XIII address rules in proposed §1.1502-59A regarding the general application of the BEAT to consolidated groups.
• Part XIV addresses proposed amendments to §1.383-1 to address limitations on a loss corporation’s items under section 382 and 383 in the context of the BEAT. P
• art XV describes reporting and record keeping requirements.

Download Proposed BEAT Regulations

1 IRC § 59A.

2 IRC § 59A(e).

3 IRC § 59A(b).

4 IRC § 59A(d).

5 IRC § 59A(c)(4).

6 IRC § 59A(b).

7 IRC § 59A(b)(3).

BVI Government Plans Legislation to Address EU Concerns on Economic Substance

The Premier announced that the BVI Government has responded constructively to the European Union’s listing exercise and will take all reasonable steps to address EU concerns relating to ‘economic substance’.  The Premier also announced that Cabinet has approved a Bill to meet this commitment. It is planned that the House of Assembly will be asked to consider the new legislation at the Sitting on Thursday 13 December, with the intention that the legislation will be in force by 31 December 2018 – the deadline set by the European Union.

The EU is compiling a list of non-cooperative jurisdictions on the basis of certain criteria it has set covering tax transparency, fair taxation and compliance with the OECD’s Base Erosion and Profit Shifting (BEPS) requirements. As part of this process the EU screened 92 countries in 2017 – including large nations such as the US and China. The BVI Government engaged positively with the EU throughout the screening process.

Due to the damage caused by the September 2017 hurricanes, a number of countries/jurisdictions, including the BVI, were given more time to commit to meeting the EU’s concerns. The Council of the EU accepted BVI’s commitment in March 2018.   The BVI meets the EU’s criteria when it comes to transparency, anti-BEPS measures and the general principles of ‘fair taxation’. However, the EU required further assurances from the BVI and other low or zero corporate income tax jurisdictions including Bermuda, the Cayman Islands and the Crown Dependencies on the issue of ‘economic substance’, set out in criterion 2.2 under the heading of ‘fair taxation’.

The new legislation will introduce economic substance requirements for all companies and limited partnerships which are registered and tax resident in the BVI. Every Corporate Service Provider registering a company that falls under the scope of the legislation will have to know where the company or limited partnership is tax resident and must be ready to relay that information to the BVI’s competent authorities.  If a company or limited partnership is tax resident in the BVI, it must demonstrate ‘economic substance’. Companies and limited partnerships that are tax resident in the BVI will have the opportunity to upskill those who work in the financial services sector through providing value-added services and increased sophistication of the sector. Companies and limited partnerships which are tax resident in BVI must, in relation to any relevant activity, carry out core income generating activities in BVI.

Relevant activities are: banking business, insurance business, fund management business, finance and leasing business, headquarters business, shipping business, holding business, intellectual property business, and distribution and service centre business.

The BVI is not alone in facing these challenges. But in every challenge there is an opportunity and the Government will engage closely with the BVI’s international business and financial services sector to ensure that the jurisdiction continues to provide services that benefit the global economy. The BVI is resilient. And the BVI is united in ensuring that we continue to put in place the conditions to allow existing sectors, and new sectors, of our economy to prosper and grow.”

Background In December 1997, the Council of the European Union adopted a resolution on a Code of Conduct for business taxation with the objective of curbing harmful tax competition and established the Code of Conduct Group (COCG) to oversee its implementation. In 2016, the European Union adopted criteria covering tax transparency, fair taxation and anti-base erosion and profit shifting (BEPS) against which countries were assessed during a screening process conducted by the COCG during 2017. No concerns were raised by the COCG regarding the BVI’s standards of tax transparency and implementation of anti-BEPS measures. The BVI was also regarded by the EU as compliant with the general principles of fair taxation. Jurisdictions with low or zero rates of corporate income tax were also assessed against criterion 2.2 (under the “fair taxation heading) which states: “The jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction.” Following the screening process the COCG expressed concerns about BVI’s possible compliance with the criteria regarding a “legal substance requirement for entities doing business in or through the jurisdiction”. The COCG also expressed concern that the lack of legal substance requirements in BVI “increases the risk that profits registered in a jurisdiction are not commensurate with economic activities and substantial presence.”

In response, the Government made a commitment to implement reforms by the end of 2018 to ensure that BVI businesses have sufficient economic substance. Other jurisdictions (including the Crown Dependencies, Bermuda and the Cayman Islands) made similar commitments. The BVI was placed in “Annex II” of the list of jurisdictions produced by the COCG and endorsed by the EU Economic and Financial Affairs Council. Annex II lists jurisdictions that were identified as raising concerns but had made appropriate commitments to resolve them. The Government has entered into dialogue with the European Commission both in plenary sessions (with other jurisdictions) and bilateral meetings. Discussions have also taken place with individual EU Member States and with the OECD. The EU is expected to review legislation passed by BVI and other criterion 2.2 jurisdictions in early 2019. It is then the EU’s intention to announce an updated list of non-cooperative tax jurisdictions by March 2019. The OECD has recently adopted substantial activities requirements to be applied to jurisdictions that levy low or (like BVI) zero corporate income tax. This means that substance rules will no longer be a EU standard but will be a global standard. The BVI has always adhered to global standards and will continue to do so.

Read more at: http://bvifinance.vg/language/en-GB/News-Resources/ArticleID/3001/BVI-Government-Plans-Legislation-to-Address-EU-Concerns-on-Economic-Substance

To learn more about the British Virgin Islands' financial services, visit BVI Finance. Connect with us on Facebook, Twitter, and LinkedIn.

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Latin American Ministers launch regional initiative to combat tax evasion and corruption

Uruguay’s Minister of Economy and Finance Danilo Astori hosted  a discussion with Ministers, high level representatives and senior officials from Latin America on how to strengthen regional efforts to combat tax fraud and corruption. The meeting concluded with the signing of  the  the Punta del Este Declaration in which the Ministers and Deputy Ministers of Uruguay, Argentina, Panama and Paraguay agreed to:

• Establish a Latin American initiative to maximise the effective use of the information exchanged under the international tax transparency standards to tackle tax evasion, corruption and other financial crimes.

• Explore further means of cooperation including wider use of the information provided through exchange of tax information channels for other law enforcement purposes as permitted under the multilateral Convention on Mutual Administrative Assistance in Tax Matters and domestic laws, and also effective and real-time access to beneficial ownership information.

• Establish national action plans to further the cooperation objectives and have representatives report on the progress made at the next plenary meeting of the Global Forum.
  
  

At the meeting, hosted by Uruguay in the margins of the 11^th Global Forum Plenary, the gathered officials also encouraged other interested jurisdictions to join the regional initiative, with additional signatures anticipated in the near future. 

OECD invites taxpayer input on seventh batch of Dispute Resolution peer reviews

Improving the tax treaty dispute resolution process is a top priority of the BEPS Project. The Mutual Agreement Procedure (MAP) peer review and monitoring process under Action 14 of the BEPS Action Plan was launched in December 2016 with the peer review process now well underway.

The peer review process is conducted in two stages. Under Stage 1, implementation of the Action 14 minimum standard is evaluated for Inclusive Framework members, according to the schedule of review. Stage 2 focuses on monitoring the follow-up of the recommendations resulting from jurisdictions' Stage 1 report. To date, four rounds of Stage 1 peer review reports covering 29 jurisdictions have been released.

The OECD is now gathering input for the Stage 1 peer reviews of Brazil, Bulgaria, China (People's Republic of), Hong Kong (China), Indonesia, Papua New Guinea, Russian Federation and Saudi Arabia, and invites taxpayers to submit input on specific issues relating to access to MAP, clarity and availability of MAP guidance and the timely implementation of MAP agreements for each of these jurisdictions using the taxpayer input questionnaire. As taxpayers are the main users of the MAP this input is key for the review process and we encourage taxpayers and associations of taxpayers (e.g. business and industry associations) to complete the questionnaire and return it to [email protected] (in Word format) by 13 December 2018 at the latest.

For more information on the BEPS Action 14 peer review and monitoring process, visit: www.oecd.org/tax/beps/beps-action-14-peer-review-and-monitoring.htm

OECD releases latest results on preferential regimes and moves to strengthen the level playing field with zero tax jurisdictions

International efforts to curb harmful tax practices and prevent the misuse of preferential tax regimes are having a tangible impact worldwide, according to new data released today by the OECD.

The latest progress report from the Inclusive Framework on BEPS covers the assessment of 53 preferential tax regimes, demonstrating jurisdictions' continuing resolve to ensure that tax breaks are only offered to substantive activities and only if they do not pose risks of harmful competition to others.

The assessment process is part of ongoing implementation of Action 5 under the OECD/G20 Base Erosion and Profit Shifting Project. The assessments are undertaken by the Forum on Harmful Tax Practices (FHTP), comprising of the more than 120 member jurisdictions of the Inclusive Framework. Action 5 revamps the work on harmful tax practices with a focus on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for preferential regimes, such as IP regimes. The latest batch of assessments includes:

• 18 regimes where jurisdictions have delivered on their commitment to make legislative changes to abolish or amend the regime (Andorra, Curaçao, Hong Kong (China), Mauritius, San Marino and Spain).
• Four new or replacement regimes that have been specifically designed to meet Action 5 standard (Lithuania, Mauritius and San Marino).
• New commitments to make legislative changes to amend or abolish a further 10 regimes, by Aruba, Australia, Maldives, Mongolia, Montserrat, the Philippines and Saint Lucia.
• An additional 17 regimes that have been brought into the FHTP review process (Aruba, Brunei Darussalam, Curaçao, Gabon, Greece, Jordan, Kazakhstan, Malaysia, Panama, Paraguay, Saint Kitts and Nevis and the United States).
• Four other regimes that have been found to be out of scope, not yet operational or were already abolished or without harmful features (Aruba, Kenya, Paraguay).

Having completed this latest set of reviews, the cumulative picture of the Action 5 regime review process is as follows, bringing the total number of regimes reviewed to 246:

These results indicate the extent of continuing work to end harmful tax practices, and ensures that in the future all preferential regimes require real substance.

• Consult the updated conclusions of regime reviews

Given that all preferential regimes for geographically mobile income must now meet the Substantial Activities Requirements, it is essential to ensure that business activity does not simply relocate to a zero tax jurisdiction in order to avoid the substance requirements. This would tilt the playing field for those that have now changed their preferential regimes to comply with the standard and jeopardise the progress made in Action 5 to date. Against this backdrop, the Inclusive framework has decided to apply the Substantial Activities Requirement for "no or only nominal tax" jurisdictions.

"This new global standard means that mobile business income can no longer be parked in a zero tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location," said Pascal Saint Amans, director of the OECD Centre for Tax Policy and Administration. "The Inclusive Framework's actions will ensure that substantial activities must be performed in respect of the same types of mobile business activities, regardless of whether they take place in a preferential regime or in a no or only nominal tax jurisdiction."

• Consult the new global standard on substantial activities in no or only nominal tax jurisdictions

The FHTP will next meet in January 2019, to assess continuing reviews on the remaining regimes for which commitments to amend or abolish were made in 2017. Further discussion on all other regimes will take place through the FHTP review process in 2019. The FHTP will also work on the next steps for assessing compliance with the global standard for no or only nominal tax jurisdictions, and continue to report results to the Inclusive Framework.

OECD and tax officials from Eastern Europe and Central Asia discuss BEPS implementation

Over 60 delegates from 16 countries, international and regional organisations, business, civil society and academia gathered in Yerevan, Armenia on 7-9 November 2018 for a regional meeting of the Inclusive Framework on BEPS in Eastern Europe and Central Asia. This was the latest in a series of regional meetings offering participants from different regions in the world the opportunity to provide their views and input into the Inclusive Framework on BEPS from a regional perspective and in a regional setting.

The event was hosted by the State Revenue Committee of the Republic of Armenia in co-operation with the OECD and the Intra-European Organisation of Tax Administrations (IOTA). Opened by the Chairman of the State Revenue Committee of Armenia, Mr. Davit Ananyan, the meeting was co-chaired by Ms. Nairuhi Avetisyan, Head of the Transfer Pricing and International Projects Division, State Revenue Committee of Armenia, and Mr. Wolfgang Büttner, Technical Taxation Expert at IOTA.

Participants shared and discussed the steps and actions taken in their respective jurisdictions to implement the BEPS measures which were released in October 2015. The meeting dealt with recent developments, in particular as regards to peer review mechanisms and timelines for the implementation of the four BEPS minimum standards and the signing of the Multilateral Instrument (MLI) to implement tax-treaty related BEPS measures. The meeting provided participants with the opportunity to work together on practical case studies on country-by-country reporting for the activities of multinational enterprises (BEPS Action 13), on preferential tax regimes and exchange of information on tax rulings (BEPS Action 5), as well as on treaty shopping and treaty abuse (BEPS Action 6).

Furthermore, the meeting gave an update on the transfer pricing follow-up work and the development of toolkits to support low-income countries. Participants discussed the range of capacity-building initiatives to strengthen countries' tax systems and administration including the joint OECD/UNDP initative Tax Inspectors Without Borders.

• Read the summary of the discussions

US Rejects Digital Economy Taxation Efforts by EU

Washington – U.S. Treasury Secretary Steven T. Mnuchin issued the following statement regarding digital tax proposals:

“Treasury is working very closely with the OECD and our counterparts there to address issues of base erosion and fair taxation.  We believe the issues are not unique to technology companies but also relate to other companies, particularly those with valuable intangibles.  I have instructed our team to continue their efforts in the OECD so that we can make progress on these issues quickly.  I highlight again our strong concern with countries’ consideration of a unilateral and unfair gross sales tax that targets our technology and internet companies.  A tax should be based on income, not sales, and should not single out a specific industry for taxation under a different standard.  We urge our partners to finish the OECD process with us rather than taking unilateral action in this area.”